How Plaid is Quietly Building a Financial Data Empire
A brief examination of the startup’s current and potential growth
If you’ve used your phone to complete a purchase, apply for a loan, or make an investment, there’s a high probability it’s been facilitated by Plaid. As an infrastructure technology product, Plaid’s work is done mostly behind the scenes — but this doesn’t make it any less important than the apps it empowers.
Since launching five years ago, Plaid has connected nearly two thousand financial applications — (think Paypal, Robinhood, Coinbase, etc.) to virtually every large financial institution. What started as a simple consumer payment API has evolved to become a robust platform it licenses today, offering developer tools to perform the transfer of data from bank to application.
Through looking at the numbers, it’s clear that Plaid has garnered trust from banks and startups by bridging the data divide between the two. To understand its current scale, this write up focuses on the strategy and regulation underlying Plaid’s growth, as well as the potential for future product expansion.
Regulatory fate
Plaid’s competitive advantage comes from being the gate-lifter in an otherwise disjointed banking system. Incidentally, the idea for the company came about when the founders ran into trouble while building a consumer finance app. Within the US’s closed-banking system, financial institutions have limited incentive to provide the tech that gives apps access to a user’s data—doing so would topple the monopoly banks currently enjoy on consumer financial services. In response, Plaid had to play a bit of hopscotch and program its own integrations to banks, resulting in a surprisingly useful few lines of code.
While the US lags behind Europe in initiatives toward open banking, this probably won’t be the case forever. Directives like PSD2 in the European Union have sought to increase data flow within banks, making open banking practices the standard instead of a choice. As data-sharing becomes status quo, third-party providers have a greater opportunity to compete with banks, opening up new business models based on account aggregation.
Although banks dominate in terms of scale, fintech companies better understand what customers truly want: choice and control of their data. In a market that hinges on digital utilities, no bank wants to be the one to tell customers, “sorry, you can’t use this product through us.” Given an approaching set of mandates, financial institutions are forced to attempt in-house innovation or take the M&A route to stay relevant.
Security catch
For customers, more open banking comes with greater trust — and greater risk. Perhaps the biggest tradeoff exists in transactions, where users benefit from efficient login and retrieval process (i.e. entering bank username and password vs. entering card credentials) while assuming the potential externalities of unauthorized fraud. With increased fluidity of data, organizations have resorted to multi-factor authentication steps such as photo ID in addition to bank credentials.
To its credit, Plaid has established a reputation of competence through enforcing access controls, routine tests, and encryption standards to verify authenticity. There’s not much room for error with security, as a single breach would erode customer trust and relegate the platform to the margins of API providers.
Given open-banking practices are in their infancy stage, we’ve yet to see a large scale, sophisticated anti-fraud solution, which could be the x-factor of de-risking third-party aggregation. Within this course of innovation lies an opportunity for Plaid to partner with the next-generation of fraud-prevention software, like facial recognition providers.
Build, then buy
Flush with funding and a handful of veteran advisors, Plaid put its capital to use by acquiring Quovo, a similar platform that collects consumer financial account data, earlier this year. Basically, Quovo is like an Alexa that organizations can put into consumer’s wallets, answering questions about how they spend their money, where they’re invested, and what their financial situation is. While Plaid has focused mainly on banking and payments, Quovo aggregates data from instruments like brokerages, student loans, and mortgages.
Plaid already offers a platform for developers to access financial data, but the Quovo acquisition extends its reach to the investment and lending spaces. Since Quovo has established ground with brokerage and wealth management services, Plaid is leveraging its specialty to further build onto the data access stack.
As founders Zach Perret & William Hockey note:
“Together, we’ll build a single platform that developers and large companies alike can use to build any financial application — from payments to lending to wealth management.”
Plaid’s acquisition of Quovo is a small step toward commanding the oceanic flow of consumer financial data. It puts them ahead of any other aggregator and foreshadows its billion-dollar function of ultimately productizing that data.
Business model agility
One of Plaid’s biggest strengths to date has been its ability to adopt additional use-cases. After early success with payments, it quickly parlayed its offering into a suite of new products, each of which incorporated the access and aggregation tools that were built from the start. As banks and fintech companies continue vying for consumer’s money, new products and services will inevitably be created, giving Plaid further ground to expand its market.
Plaid has already proved there’s a good business model based on data access and aggregation, but waiting to be executed is a really good business model based on stretching data into products. The concept isn’t really novel, as enterprise companies have been rolling out analytics products for years (e.g. Stripe). The difference at play is the sheer scale of financial data Plaid can translate, as well as the opportunity to angle toward consumers. Once solidified, Plaid’s influence over data flow can work to empower individual users of the apps it licenses to. If giving meaning to data is the ethos of contemporary consumers, then Plaid has been ordained as the entity to do it.
Lined up: consumer inclusion
Of course, a $2.65B valuation and endorsement from one of the GOAT growth investors amounts to more than just a successful API tool. Indeed, Plaid hasn’t maximized its value yet, and the path to continued growth involves a bit of product roadmapping.
The growth question boils down to how Plaid will extract more value from its current customers and increase its customer base.
In the short run, it’s likely Plaid will focus on getting as many overlooked banks and credit unions onto its platform as possible. There’s still an underserved demographic that doesn’t bank with large financial institutions, and it’s currently on Plaid to get them connected to their favorite services.
In the future, my bet is on the inclusion of consumer products, which can manifest in a couple of different ways:
- Launching a native tool that gives consumers transparency in what they’re connected to — including the consent that is provided, and how they can change that consent (e.g. reports, visualization)
- Launching an application that serves as a convergence point of all the newly automated financial tools — things like bill pay, savings, transfers, investing, and recommendation tools. The average US bank account is connected to a host of services; consolidating would reduce friction in using these tools.
These predictions are non-specific in nature and may be off, however, what’s indisputable is that Plaid has gathered momentum toward a consumer data stronghold, giving it a unique opportunity to expand to consumers.
Concluding thoughts
In an industry that is constantly evolving, Plaid has set itself apart through supporting the backbone of our digitally-powered financial system. As a brand leader in fintech, it will continue to benefit from the acceleration of digital financial products, and more, have a chance to execute its own.
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