Plaid's future without Visa

Now that its merger with Visa has been scuttled, what does Plaid’s future look like and how might banks be affected?

The San Francisco-based financial data aggregator, which gathers consumers’ bank account data on behalf of 3,000 fintech clients, agreed to become part of the card network last January. But after a lengthy review by U.S. regulators and an antitrust suit brought by the Department of Justice, the two organizations dropped their plans to merge.

Plaid touches almost all banks, whether they’re aware of it or not. Similar to other aggregators like Yodlee and Finicity, it gathers bank account information mostly by using a customer's online or mobile banking credentials. A bank may never notice what is happening, which has led to past friction between Plaid and the financial services industry.

The proposed merger was seen as positioning Plaid more squarely into the banking ecosystem. Now that the deal has been called off and Plaid is remaining independent, the company says it is committed to improving its soured relationship with the industry.

Some see silver lining in merger being aborted

Some Plaid employees have expressed some disappointment that the merger didn’t go through.

“I can certainly understand why they are disappointed,” said Ryan Gilbert, general partner at Propel Venture Partners. “They had a big, globally announced merger that dragged on for a year and didn't consummate, not because the parties got cold feet, but because the U.S. federal government continued to push on competition issues.”

Zach Perret, Plaid's CEO and a co-founder, offered an upbeat reaction: “While Plaid and Visa would have been a great combination, we have decided to instead work with Visa as an investor and partner so we can fully focus on building the infrastructure to support fintech.“

It’s hard to say exactly what Visa would have done with Plaid had the merger gone through. In one scenario, Visa could have infused a lot of cash into Plaid and enabled it to move quickly into new areas. In another, Visa could have ceased Plaid's operations.

There could be advantages for Plaid in remaining independent.

Not being bought by Visa “liberates us a bit in the short term, because if we had continued with the transaction and gone through this lengthy legal process, who knows how long that would've taken,” noted Ginger Baker, head of financial access at Plaid.

Analysts agreed that Plaid should be fine.

“When [the merger] was announced a year ago, the world was a very different place and expectations and outcomes were very different,” said Stephen Greer, senior analyst at Celent. “What we've seen over the last 12 months is validation and acceleration of the move towards digital e-commerce, towards digital banking becoming more central. With everything that's happened over the last year, Plaid is in a much stronger position than it was last year.”

Ryan Gilbert, general partner at Propel Venture Partners, the BBVA-backed venture capital firm, sees Plaid’s continued independence as a good thing for the financial services system. Gilbert does not have any investment in the company.

The Plaid team is young, smart and battle-tested after spending a year dealing with Visa, lawyers and the Department of Justice, he said.

“I think they have a very good understanding of the landscape and any concerns that they may have to deal with in the future,” Gilbert said. “And I hope that they do continue to push on the payment side of things, because if they can bring better, more cost-effective payments to American consumers and consumers globally, and be competitive perhaps to Visa, Mastercard, American Express, Discover, and any other payments scheme, we’re all going to benefit a lot.”

Conflicts with banks remain an issue

When Visa was planning to acquire Plaid early last year, Visa CEO Al Kelly said: “We know there are financial institutions who would prefer Plaid operate differently in some cases. And we intend to address those concerns.”

Banks have objected to several practices of Plaid, including the way it uses bank customers’ online and mobile banking credentials to screen-scrape their bank account data. Banks have also objected to the way Plaid uses banks’ logos in the process of asking consumers for their username and password, without banks’ permission.

In the fall of 2015, Wells Fargo, JPMorgan Chase and Bank of America were accused of blocking personal financial management companies and data aggregators from screen-scraping customer information. Critics said the banks were sick of competing with fintechs and PFM providers and were trying to cut them off from the data they need. The banks said screen-scraping bots were causing bottlenecks in their systems and opening a door for fraudsters because it was hard to tell the true customers apart from aggregators and suspicious actors.

In 2018, a similar kerfuffle erupted between Plaid and Capital One. Plaid accused Capital One publicly of blocking it from accessing bank account data; Capital One said it had upgraded its security protocols and that Plaid needed to adjust its methods.

This past October, TD Bank sued Plaid for trademark infringement and false advertising. In December, PNC sued Plaid for trademark infringement. Both complained about Plaid's use of their logos in the screens it displays for consumers.

JPMorgan Chase, Wells Fargo, and some other banks have hammered out legal agreements with Plaid and other data aggregators through which the bank sends customer account data to the aggregator, rather than the aggregator logging in and screen-scraping it for itself.

But these arrangements have flaws. On Friday, for example, JPMorgan Chase CEO Jamie Dimon said on a call with analysts there are “people who improperly use data that’s being given to them, like Plaid. You can expect that there will be other battles that take place here.” The bank and Plaid have had a data-sharing agreement in place since October 2018.

“I don't think the battle that Plaid has had in the past with larger institutions like Chase, PNC, etc., is going to go away in the short term,” Gilbert said. “Perhaps some of the larger institutions are going to be a little emboldened and feel, well, let's kick these guys while they’re down. And my advice to those big banks is, don't hit them while they’re down, rather give them a hand and pull them up again, so you can partner. I’d sooner be backing David in this battle than Goliath. Threatening litigation is a game, the only people that are going to win are the lawyers.”

Ultimately, Plaid will prevail in such a legal battle because of the 3,000 fintechs that the company has signed on as clients, he said.

“They have the wind in their sails from the fintech ecosystem,” Gilbert said. “The number of fintechs that they've helped get into business and survive and thrive is amazing. They’re that critical as a provider of essential central services.”

Gilbert said Plaid has probably heard banks and regulators’ concerns about it over the past year.

“If they are tone deaf or simply just deaf and haven't heard it, then it will be an absolute disappointment,” Gilbert said. “I think we're going to see, from a banking industry perspective, a friendlier Plaid that listens more closely and a Plaid that will put a lot of emphasis on industry relations. I think that's going to be very important for them to survive and thrive.”

A more bank-friendly Plaid?

Plaid says it wants to play nicer with banks. It has set a goal of moving 75% of its traffic from screen scraping to application programming interfaces.

Six months ago, Plaid hired Ginger Baker, who previously worked at Visa, Square, Facebook and Ripple, to run a new group at the company that would reach out and talk to banks and draw them in as customers.

“We have invested quite a bit in ensuring that this API-based method of data exchange is accessible to all kinds of institutions,” Baker said. “The launch of Plaid Exchange this year demonstrated our commitment to ensuring that all institutions, regardless of their size and what type of resources they have, can provide API-based access to their customers.”

Hundreds of financial institutions have made Plaid Exchange part of their digital strategy, she said. Some of these are Jack Henry customers. Plaid and Jack Henry signed an agreement in November whereby the core banking software vendor is helping its customers connect with Plaid Exchange.

Some banks want to use pieces of Plaid Exchange, she said. For instance, some are just signing up for what Plaid calls “transaction enhancement,” where Plaid cleans up data to make it easier to understand. (Other data companies, including MX, also do this.)

A sorting out for data sharing

The aborted merger and recent lawsuits are evidence that data sharing remains an important issue and the tussle over consumers’ data has yet to be fully worked out.

The Consumer Financial Protection Bureau is working on rules for data sharing that may settle some of the problems between aggregators, fintechs and banks.

The CFPB is likely to force all parties to give consumers more control over their own information.

“With a new administration and potentially a more empowered CFPB, there’s going to be a focus on the rights of consumers to tell both data providers and data purchasers, stop using my data, give me a turn-off switch,” Gilbert said. “We're going to see a lot of consumer protection elements get built into the system and an entity like Plaid should be able to take the leading role in making that happen.”

For banks, trying to block fintechs and their aggregators is not going to work as a strategy.

“Consumers have spoken,” Greer said. “They want to use Robinhood, they want to use Betterment, they want to use Acorns, they want to use fintech apps, period.”