Data Sharing Partnerships Give a Big Boost to Open Banking

Once considered a European anomaly, open banking is gradually becoming mainstream in the U.S., but by an entirely different route. Announcements from two data aggregators demonstrate growing marketplace acceptance of secure data sharing between financial institutions and fintech providers.

Plaid has taken a big step in its journey from banking “enemy” to “collaborator” by inking a data-sharing deal with a major digital banking platform provider. The data aggregator and Q2 announced a partnership by which Q2’s community bank and credit union clients will be able to easily access the Plaid Exchange open finance platform.

This was not Plaid’s first partnership with a bank technology platform provider — in late 2020 Plaid signed an agreement with Jack Henry & Associates to make Plaid Exchange available to about 350 users of Jack Henry’s Banno platform. The latest deal, however, is bigger, potentially involving about 500 financial institutions.

On the same day as the Plaid announcement, Envestnet Yodlee, the data aggregation pioneer, signed a data-sharing agreement with TD Bank Group to allow customers of the Canadian-based financial institution to share their data with various third party apps. It was the 13th North American bank to sign a direct sharing agreement with Envestnet Yodlee, the company stated.

Taken together, these data-sharing announcements signal a quickly changing landscape in banking, prior to (and perhaps partly because of) new open banking rules expected from the Consumer Financial Protection Bureau.

( Dig Deeper: What’s Next for Plaid’s Complex Relationship With Financial Institutions? )

Launched in mid 2020, Plaid Exchange was set up to enable smaller institutions to exchange data with third parties by means of application programming interfaces. Plaid has been setting up one-on-one API arrangements with large banks for several years as a way to move away from reliance on extracting customer account information by the practice of screen scraping.

What It Means:

As more large banks sign direct data sharing agreements with aggregators, smaller financial institutions are now able to follow… and need to.

Data aggregators built their business by supplying fintechs and neobanks with the consumer bank account data they needed to function. Although the connection to the fintechs was often by API, extracting the data from banks and credit unions relied on consumers providing account numbers and login information, allowing the aggregator to access balance and transaction data.

This practice drew sharp criticism from financial institutions as well as some members of Congress, prompting aggregators to rethink their approach.

Plaid pledged early in 2021 to get to the point by the end of the year where 75% of its data traffic was achieved via API versus screen scraping. Although direct sharing agreements with major banks account for the bulk of its traffic, the partnership with Q2 will help. Plaid says nearly a quarter of the consumer accounts connected through its platform are held at credit unions and community banks.

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Changing Views on Data Sharing

Once institutions are set up in the Plaid Exchange via the Q2 arrangement, customers of those banks or credit unions will be able to securely share account information with any of the 5,500 fintech apps connected to Plaid. Among these are some of the biggest names in the fintech universe: Chime, Venmo, Robinhood, SoFi and Coinbase.

The question of why a bank or credit union would want to facilitate such data sharing with entities that in many respects are competitors is complex. The rationale has been evolving for several years.

The simplest answer is: Because their customers want to use these often specialized fintech apps and have been doing so increasingly. That was behind TD Bank Group’s alignment with Envestnet Yodlee. “This agreement supports our goal of offering our customers a secure and confident experience when they are accessing digital services that are outside their bank,” TD’s Franklin Garrigues, VP, Digital Channels, said in a statement.

In addition, the concept that customers’ data belong to the customer, not to the financial institution, and should therefore be under consumers’ control, has become more widely accepted in the banking industry.

Altered Landscape:

Even without formal regulation, market forces in the U.S. are moving industry opinions – and practices – toward open banking.

As mentioned earlier, CFPB is also expected to issue data sharing rules to ensure consumers have the ability to easily switch financial institutions and use new, innovative financial products. That will undoubtedly add momentum to the move toward open banking.

Plaid, for one, well aware that the rules issued by CFPB could impact its business model, is positioning itself as a champion of consumer data access. It has even gone so far as to call for CFPB to supervise data aggregators.

“We’re not trying to hide from supervision or regulation,” says John Pitts, Head of Policy at Plaid and a former CFPB staffer. “We embrace it.”

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Details of the Plaid/Q2 Partnership

Q2 will integrate into the Plaid Exchange platform, allowing customers of Q2’s client institutions to authenticate the thousands of fintech apps powered by Plaid without having to share and store end-user passwords. Q2 says there is no cost to the institutions for the Plaid integration.

In addition, Q2’s financial institution customers will have access to Plaid’s OAuth-based authentication and identity APIs to speed up the digital account-opening experience. Consumers will be able to link existing bank accounts during the account-opening process, enabling them to fund new accounts within seconds, instead of waiting days, according to Q2.

“Given the transition to online account opening and onboarding, real-time and secure account funding is becoming critical to provide a great initial experience,” observes Adam Blue, Q2’s Chief Technology Officer.

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Declining Resistance To Open Banking

Given their focus on the customer and the relationship, community banks and credit unions are ideally positioned to take advantage of open finance, Blue believes. He goes further to state that reports of resistance to sharing account and transaction data is a “legacy view held by larger institutions that favor customer lock-in and friction.”

Resistance to sharing account and transaction data is a “legacy view held by larger institutions that favor customer lock-in and friction.”

— Adam Blue, Q2

Ultimately, Blue believes that to remain competitive all financial institutions have to provide unparalleled customer experience. Part of that includes offering services customers want and expect, many of which may be from fintech providers.

In an earlier article, Ginger Baker, Plaid’s Head of Financial Access, observed that opening up the flow of data to third parties actually drives a business benefit for banks and credit unions.

“Consumers see that their institution is taking care of their needs by allowing them to use the applications that they want to use,” she said. In addition, institutions benefit from the reverse flow of data coming from fintechs that work with Plaid.

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