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Jan 21, 2021

The failed Plaid-Visa merger is interesting fintech tea

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Plaid's platform lets consumers link their bank account to fintech apps. Banks aren't fans.

The financial tech firm Plaid announced this week that it’s doubling its workforce in Europe. That is largely because its planned $5.3 billion merger with Visa fell apart earlier this month after the Department of Justice filed an antitrust lawsuit. Plaid is a platform that lets you, a customer, link your bank account to a fintech app like Venmo or Robinhood. You log in using Plaid’s interface, but the bank itself is cut out of the loop. The banks hate that.

Visa could have used Plaid to expand beyond payments and maybe be legitimized in the eyes of banks. I spoke with Lisa Ellis, who researches payments at the firm MoffettNathanson. She said the DOJ also worried Visa might be trying to kill the competition. The following is an edited transcript of our conversation.

A headshot of Lisa Ellis, who researches payments and cryptocurrencies at the firm Moffett Nathanson.
Lisa Ellis (Photo courtesy of Yolanda Perez)

Lisa Ellis: They were sort of making an example, frankly, of Visa because obviously this is a theme that recently the DOJ has been focusing more on. This idea of big tech firms buying small, nascent, potential competitors to kind of take them out of the market early on — that was the angle that the DOJ came [with]. And they had leaked documents, internal strategy documents of Visa’s, that explicitly indicated this as a risk. And so that was sort of the rationale.

Molly Wood: Basically, if Visa is Facebook, they didn’t want Plaid to be the Instagram?

Ellis: Right, exactly.

Wood: I mean, does this signal, do you think, a real shift in antitrust policy, where that will be a more normal calculation that the DOJ makes?

Ellis: It’s definitely an angle that the DOJ is much more focused on. It’s a component of antitrust that’s historically not been in sort of the usual measures that you would use to determine if something meets the bar of being an antitrust violation. They’re now incorporating this thought, this idea, much more actively, this concept that larger firms may be motivated to stymie competition in their spaces by acquiring and then retrofitting, or in an extreme scenario, actually just outright shutting down small competitors.

Wood: Do you think that there will be other upsets, specifically in fintech? Like, do you think there’s going to be more scrutiny, assuming the DOJ is on a new antitrust push, that also includes not stomping out baby competitors? Do you think there will also be increased scrutiny on fintech because of the sensitivity of the information involved?

Ellis: I do. And also, with the change in administration, with the Biden administration, he’s been very open that the [Consumer Financial Protection Bureau] is one of his big priorities in terms of broadening and increasing the scrutiny on consumer protection in general, which will presumably include fintechs. In addition to that, fintechs have gotten an enormous boost from the pandemic because of people being at home [and] bank branches closed, people having a little bit of extra cash because of stimulus checks. That’s why you’ve seen this huge growth in Robinhood, in Coinbase, in PayPal and Venmo. I mean, they’ve all had huge growth, and so they’re also just suddenly much larger and on a lot more people’s radar screens. So I think over the next year or two, we’re going to see a lot more, clear regulatory framework around fintechs and how they operate and how they interact with banks, and what they need to be licensed for and all the consumer privacy and data concerns. And then, we’ll probably see a bit of a shakeout amongst them because some of these business models may not survive that new kind of level of scrutiny on the industry. And so I wouldn’t be surprised if 12, 24 months from now there’s a smaller number of larger players. And we’ve had some consolidation in the space.

Wood: In the announcement that this deal wasn’t going through, Plaid made a lot of noise about how it’s going to be fine on its own. Do you think that that is the case?

Ellis: I would say [that is to be determined]. This concept of so-called open banking is a pretty controversial topic. Many banks are uncomfortable with the way that Plaid is doing it. Now, we believe that Visa was holding off those banks because they’re all Visa customers, and Visa has had decades-long relationships with them. And then, now with Plaid independent again, or out from the air cover of Visa, we’ve already seen that narrative re-escalate. So they’re facing a tough road in the U.S., I’ll just be honest. So it’s not a surprise at all that Plaid immediately announced that they’re going to focus their efforts now more aggressively in Europe.

Wood: I don’t want to cast aspersions on the banks, but I feel like there must be something else at play here, too. Are they being prevented from making money in some other way? Is Plaid having access to data that the banks would prefer to get directly?

Ellis: Yes, yes. So I guess from the banks’ perspective, if a fintech essentially has a business model that’s built off of leveraging information in your bank account, the bank’s argument would be, “Well, a lot of that is built around our relationship and our long-term relationship with a consumer. Like, we should be getting paid for that.” So they would say, “It’s not fair to the banks for an entire industry, the fintech industry, to be built up around the concept that they can simply extract and then manipulate or do something slightly different with the data that’s just coming out of our bank accounts. We should offer those services.” At the same time, ultimately, a consumer owns their own information. So I guess that’s where the line gets a little gray. If someone’s running a credit check on you for a mortgage, you have the right as the consumer to say, “Yes, I’m providing this service with access to my credit files to run a credit check on me.” That is in your control. So the whole gray area here is just what exactly is the consumer in control of? And then also, what is the bar required to be transparent and clear to the consumer what they’re opting into and what they’re signing up for? It’s just that whole tricky area of consumer privacy, instead of [something] like: How many times do they have to opt in? And you give them disclaimers and stuff like that before you’re sure that they really understand what they’re signing up for, versus they’re just going with whatever the default is.

Wood: So, basically, the banks, it sounds like, object to Plaid because they would prefer to own the transaction, the login transaction, literally, and they just don’t trust the standards that it is employing to keep all this information safe.

Ellis: That’s right. Their argument would be [that] in many cases, these fintechs aren’t really doing anything differentiated and innovative themselves, they’re simply extracting a bunch of banking information and putting a nice user interface on it and trying to make money off of that with a consumer. In addition to that, they would say, “Even if this is all fine, and open banking is OK and fintechs are blessed, Plaid doesn’t meet the bar. [It] doesn’t meet the bar of consumer privacy and doesn’t meet the bar of security.”

Related links: More insight from Molly Wood

There is more reading on Plaid and Visa and that proposed merger and also the fascinating stuff about how banks just basically hate Plaid. American Banker points out that, indeed, it wasn’t entirely clear what Visa would have done to expand its own business with Plaid in the fold. (Is that a pun? Could have been.) But analysts and venture capitalists say it could be a good thing for Plaid to remain independent, and it’s possible the company could turn into a real competitor to Visa if they keep pushing into payments and not just connecting banks and apps.

And there are some good technical details about how Plaid is working on becoming more bank-friendly by using the banks’ own software to help customers connect instead of just stealing their logos and mimicking their login screens. And the Consumer Financial Protection Bureau, which will get a new leader under President Joe Biden, is apparently working on some rules of the road for sharing data between banks and fintech apps because the thing is, the banks might not like it, but consumers most definitely do.

There’s an article from The Banker, a global financial intelligence publication, about this idea of open banking, which has been well on its way in the U.K. for about three years, apparently, but is being held back in part by banks dragging their feet on creating software interfaces. Because, perhaps, they didn’t innovate on cool, new fintech apps that could have made them more money, and now they see their customers drifting away and they don’t like it. Is this as interesting to you as it is to me? Maybe? Hope so? I’m fascinated. Fintech 2021.

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