In a move taking it deeper into the mainstream of banking, Plaid, the fintech data aggregator that connects nearly 5,000 fintech and neobank apps to bank accounts, is building out its payments capabilities. The move has potential upsides and negatives for banks and credit unions but is seen as a direct assault on the giant card networks.
The company announced a new program in which Plaid’s ecosystem of fintech and payment players will be used to make it easier and cheaper for consumers and businesses to make digital payments funded by their bank accounts.
Plaid has long been at loggerheads with traditional financial institutions since its inception, as banks and credit unions say its use of “screen scraping” to access user data and connect it with other apps causes potential security concerns. Plaid often responded by branding financial institutions as obstructionist, standing in the way of consumers’ desires.
More recently, however, Plaid has taken a more conciliatory tone towards traditional financial institutions, recently telling The Financial Brand “the company decided that there was a bigger opportunity out there by moving from ‘cooperation when needed’ to full-on collaboration.”
Payments Power Play
Plaid hopes to revolutionize the ‘clunky and outdated’ user experience associated with current account-to-account payments.
Plaid’s head of revenue Paul Williamson told the Wall Street Journal that the new payments move will complement existing card networks and that its customers were looking for “more diversified payment capability.” Despite that assurance, some observers see Plaid’s move as a direct threat to card network dominance. The announcement came just nine months after the U.S. Department of Justice scuttled an acquisition of Plaid by Visa for $5.6 million, citing antitrust violations.
As part of the plan, Plaid is partnering with group of 50 payment partners in North America and Europe. Among the partners: Square, Dwolla, Galileo, Marqeta, Currencycloud and Silicon Valley Bank. These firms will integrate Plaid’s data aggregation technology into their systems for bank payments.
Plaid says that account-based payments are “set to be at the center of the shift to digital wallets, helping to save businesses a lot of money in credit card fee,” according to Tearsheet.
In a blog announcing the new initiative, Plaid says that integrating its technology “within payment providers’ platforms improves the often clunky and outdated bank account payment user experiences, eliminating the need for typing in account numbers. For consumers on the end of these payment journeys, that means bank payments are an easier, faster, and a more secure option than ever before.”
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A New Payments Paradigm
This new announcement from Plaid could have some potential benefits for banks, but they will likely also be watching developments with a cautious eye as well, says Tony DeSanctis, a senior director with research and analyst firm Cornerstone Advisors.
“There are still a lot of open questions because there is not a lot of detail at this point,” he says. “If [the new Plaid A2A network] is automated, simplified, or cost effective — or a combination of all three — then there is definitely a benefit to enabling that capability.”
Plaid could be seeking to create an alternative payments network that could change the economics of traditional card transactions.
However, DeSanctis adds that, “the bigger question — and this is a much broader issue — is once Plaid connects all these financial institutions, then what’s to stop them from creating an alternative network to Visa and Mastercard for transactions? And that could potentially change the economics of traditional card transactions, and have a negative impact to financial institutions.”
DOJ Telegraphs the Payments Impact
One of the reasons cited by the DOJ in its antitrust ruling against the Visa acquisition of Plaid was that a major reason Visa would want to acquire Plaid is to prevent it from building an alternative payments network. In fact, government lawyers foretold the strategic move quite specifically:
“Plaid has become the leading financial data aggregation company in the United States,” Justice wrote at the time. “Plaid is planning to leverage its connections to build a bank-linked payments network that would compete with Visa. Plaid’s money movement platform would allow consumers to pay merchants directly from their bank accounts using bank credentials rather than a debit card. [Emphasis added.] Plaid’s established connections and technology uniquely positions it to enter the payments market and disrupt Visa’s monopoly.”
Traditional institutions generate significant revenue from debit interchange, particularly those under the Durbin amendment cap.
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Plaid’s announcement is also part of a larger trend of fintechs aiming to become more integrated into the payments ecosystem.
“It doesn’t seem like a bridge too far” to think Plaid is planning to create a network to challenge the market position of Visa and Mastercard.
— Tony DeSanctis, Cornerstone Advisors
“Products like Venmo and Cash App are cost effective and easy for the average financial institution, they don’t have to do anything and they make a little bit on the interchange fee,” says DeSanctis. “But then some of those services have started enabling merchant transactions, and so then what was just a P2P service now becomes card network displacement.”
DeSanctis adds that “it doesn’t seem like a bridge too far” to think Plaid is planning to create a network to challenge the market position of Visa and Mastercard. It is perhaps such a challenge that has led to both card networks seeking to branch out their offerings. Mastercard, for example, has announced a buy now, pay later service that does not require a physical card, and Visa is active in BNPL as well.
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In Their Own Words
It is not known the extent of what Plaid’s future ambitions may be. The company did not respond to a request for comment. But the company’s blog notes that “account-based payments aren’t new, but the industry is far from realizing their full potential. Plaid is building an account-based payments ecosystem as flexible and fluid as this burgeoning opportunity: as the technology and consumer adoption evolve, so will Plaid and our partner ecosystem. “
The blog continues: “We want to enable any company to offer tomorrow’s payment experiences, today. Whether firms have existing payment provider relationships, want to leverage their own technology, or need to build a payment stack from the ground up, Plaid can help.”