In Plaid, European neobanks find an open banking passport

After regulatory pressure scuttled Visa's deal to acquire Plaid, the account aggregator is using data sharing connections to thousands of banks to attract European fintechs looking to reach the U.S. and other international markets.

Plaid is connected to more than 12,000 banks in North America, Europe and the U.K., according to Keith Grose, head of international at Plaid. U.K. This has helped the San Francisco-based technology firm win open banking business from several neobanks that are expanding internationally, including the U.K.’s Cleo, Monzo and Revolut, and Germany’s N26.

Plaid also provides its APIs to U.K.-based payment card aggregator Curve, which plans to enter the U.S. and is expanding across Europe. Plaid's U.S. location and connections to major U.S. financial institutions has helped it win open banking contracts from U.K. and European fintechs, Grose said.

By providing application programming interfaces (APIs) for onboarding and linking to customers’ existing bank accounts, Plaid supports financial services such as transfers and account aggregation for fintechs that rely on consumers' existing bank accounts. The APIs are standardized, meaning users of Cleo’s budgeting and savings app for example, have consistent experience in both the U.K. and the U.S, according to Grose.

The Payment Services Directive 2 (PSD2) mandates open banking in Europe, though market forces are spurring open banking in other countries such as the U.S. Open banking has grown quickly in the U.K. About four million consumer and business open banking payments were made in the U.K. in 2020, according to the Open Banking Implementation Entity, a U.K. standards body.

Plaid began providing PSD2 open banking-compliant APIs in Europe two years ago, and is currently live in four EU countries plus the U.K., where it connects to 90 British financial institutions. Other firms offering open banking technology in the U.K. and EU include Yapily, Token, TrueLayer, and Tink. In June 2021 Visa announced plans to buy Tink after abandoning its bid to purchase Plaid, which faced pushback from the U.S. Department of Justice.

Since there is significant regional variance in financial services regulations and consumer needs, Plaid has a ‘think globally, act locally’ approach, Grose said. Plaid tailors its products in accordance with local regulations for customers in each country as it expands. "Europe is more than just a hub for Plaid, and we have plans to expand quickly across the continent. Our vision is to ultimately build a global and inclusive ecosystem,” Grose said. “In the U.S., we’re at a point where banks are starting to expose their APIs even without regulation.”

Plaid has data-sharing agreements with the majority of the top-10 U.S. financial institutions, and its Plaid Exchange is used by hundreds of smaller U.S. banks to share account data with fintechs through APIs. In May 2021, Plaid and U.S. Bank agreed to share bank customers’ account data through an API.

A key challenge in Continental Europe is the quality of open banking APIs, which varies across the EU. While some EU members such as Ireland and the Netherlands are making positive strides to drive open banking adoption, other European countries are far behind, according to data compiled by Yapily. Plaid connects to PSD2-compliant APIs in Europe, Grose said. "So if we find that a bank has poor open banking APIs, we work with EU regulators and policymakers to help the bank improve its APIs.”

Plaid also hopes to gain traction from a growing demand for open banking-driven small business payments, where adoption in the U.K. is ahead of the EU, creating an addressable market.

“We’re seeing a large and growing segment of businesses using open banking for B2B payments in the U.K.,” said Grose. “Open banking-based invoice payments offer significant savings for businesses compared to accepting card payments."

Businesses pay a single flat fee for an open banking payment, Grose said. If a company sends £10,000 to another business, it costs 20 pence for an instant transfer via the U.K.’s Faster Payments scheme as opposed to 1-3% for paying with cards. "Also, card payments take several days to clear, so instant payments help the biller with their cash flow," Grose said.

British B2B banking provider GoSolo, which uses Plaid’s APIs, reports that open banking has reduced the manual work required to process payments. Contractors who are GoSolo clients use the technology to email invoices with an embedded payment link and receive immediate payment, according to Dima Pimakhov, GoSolo’s CEO. “There’s no need to enter any payment details as these are pre-populated in the payment," said Primakhov. "Traditionally, when a client receives an invoice, they have to open their banking app and make a manual payment by retyping the payee name, account details and amount. This is tedious and error-prone.”

Business usage of open banking payments is developing slowly in the EU because of API quality issues, according to Iana Dimitrova, CEO of London-based OpenPayd.

Europe’s PSD2 regulations requiring the creation of open banking APIs focused on the development of APIs for European consumer retail banks, Dimitrova said. Consequently, in some parts of Europe open banking payments APIs for consumer applications are more advanced than for business use cases.

“For some larger enterprises, the APIs necessary for open banking payments aren’t available yet in Europe,” said Dimitrova. “Yet there still exists a huge opportunity for open banking in the B2B payments space.”