Top Card Networks Fuse with FinTech
The economic turbulence in 2020 comes from health concerns, rising unemployment, businesses shutting down, and political tensions. Despite all the uncertainty, one constant remains in financial services: deal activity in FinTech. Spilling over from 2019, numerous firms are still being acquired or planning to go public in 2020 — a ray of hope for a faster global recovery from COVID-19’s impact.
The two major card networks most widely used around the world, Visa and Mastercard, made moves this year into FinTech by acquiring bank account data aggregators. Visa’s acquisition of Plaid (in January) and Mastercard’s acquisition of Finicity (in June) show a trend of expansion to a global, diversified business strategy in financial services.
Historically, card companies connected all parties involved in branded network payments (purchaser, merchant, issuing bank, card provider) through a non-profit associations (the original Visa and MC entities). These groups helped process interbank clearance (through an open-loop system): card payments from an issuing bank were now able to make it to a merchant account at a different bank. Similar frameworks still exist in today’s ACH clearing model through NACHA.
Both Mastercard (in 2006) and Visa (in 2008) transitioned from associations to publicly traded companies — streamlining the process for speed, accuracy, and minimizing fraud across the payments industry. Over the last 12 years, both companies have expanded their lines of business away from traditional cards towards encompassing all payment types and aggregating financial data.
Why the focus on fintech’s data aggregation firms?
FinTech data aggregation firms like Plaid and Finicity offer multiple advantages for these well-established card networks in expanding both existing lines of business and new revenue streams:
These data aggregators connect thousands of financial institutions and FinTech apps to consumer bank data through APIs, which uses tokenized access for a consumer through their bank’s secure web domain (instead of sharing private credentials). About 2/3 of bank accounts using apps in the US are now connected through a 3rd party aggregator;
New add-on tools for lenders and banks improve credit decisions, account verification, and data share — all features that help a card network’s existing core business;
Opens the door towards the promise of “big data” analytics and uncovering deep insights on consumers, as a future revenue driver;
Offers multiple cross-sell product opportunities to lenders and other fintechs that expand product offerings;
Provides a path towards Open Banking and being a critical enabler of customers controlling future access and use of their banking history.
Despite all the benefits, data aggregation in financial services has been challenged by banks concerned over their clients’ lack of knowledge of how data is being shared and to whom. Banks like PNC and Capital One have struggled with allowing aggregators to connect with their customer’s accounts due to security concerns of data breaches. Frustrated customers unable to connect apps like Venmo, then become upset with their bank and look to switch providers.
As a solution in getting all sides to work together for the benefit of consumers, Finicity teamed up with several lenders to create the Financial Data Exchange, a non-profit focused on uniform practice and standards for sharing individual banking data. Through their work in the last few years, they have set an industry standard in the US.
what’s next for fintech and financial institutions?
Partnerships between financial institutions and FinTech companies have existed for the last decade. Acquisitions (such as Plaid and Finicity) are a recent occurrence — expected to continue in niches that offer access to partnerships, networks, expertise, and new revenue streams. What hasn’t taken place? Institutions building their own internal channels for financial services innovation.
In the last 5-10 years, banks have stood back and watched fintechs create, iterate, and scale growth in new products and services. In the new decade of 2020, anticipate the pace of internal development to pick up through acquiring top talent (from FinTech startups), incubating early stage companies through internal accelerator programs, and new targeted initiatives based on expansion strategy in customer acquisition and retention.
As the payments landscape continues to shift away from cash, cards, and legacy rails (ACH, SWIFT, interchange from card) — faster, low-cost networks from blockchain and stablecoin frameworks will disrupt the business models of large institutions. Banks and other incumbents looking to stay relevant will start planning for these industry changes through innovation from internal channels.
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