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Dawn of the Data Network

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Visa has laid down the marker for an institutional data network with its acquisition of Plaid. A lot still needs to happen for this to materialize, but it is no longer possible for US banks to assume that open banking will not arrive at their shores. They need to move fast to seize early-mover advantage and use this as a trigger to fundamentally change how they operate.

The authors of the BCG White Paper are Inderpreet Batra, who is a Managing Director & Partner in the New York City office of Boston Consulting Group. Steve Mallouk is a Managing Director & Partner with BCG Digital Ventures, in the firm’s Seattle office and Sushil Malhotra, Managing Director & Partner in the firm’s New York City office.

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Dawn of the Data Network

  1. 1. Working Paper Dawn of the Data Network Inderpreet Batra, Steve Mallouk, Sushil Malhotra January 2020
  2. 2. Working Paper 1 BOSTON CONSULTING GROUP January 2020 isa's acquisition of Plaid heralds a new frontier in the consumer-permissioned data space. The announcement sets up the institutionalization of data sharing in the US and the potential to extend globally, like with its payments network. It forebodes the creation of a formal 'data network' with a clear set of rules, permissions and obligations of data furnishers and data users. Which in turn should lead to a substantial increase in the number of use cases that rely on consumer-permissioned data, and make banking and payments far more competitive than it currently is. Open Banking has officially arrived to the US. Or has it? Plaid's current model is not particularly friendly to banks, particularly if they're not connected via an API. Screen-scraping is not secure as it exposes login credentials outside the banking environment and creates a drain on the bank's technology resources. Most US banks are not ready for a world where money and relationships can move around at the drop of a hat, based on who's delivering the best value to the customer - customer inertia is still the biggest driver of value for many of them. Visa will have to change both how Plaid operates and the current bank mindset - the former clearly being far easier than the latter. Regardless, this deal does set up the potential for game-changer moves in the banking and payments ecosystem. Banks can no longer ignore the threat of open banking and need to up their game on both defending themselves and realizing the associated opportunities. Core banking providers and payments processors need to enable multiple new use cases and potentially create new ones themselves. This deal also kicks off the race to be the second data network, one that will arguably be more bank-centric than Plaid is. It represents an opportunity for players like Mastercard and core banking providers like FIS and Fiserv to step in and create a differentiated offering, potentially in partnership with banks. Watch this space. What is Plaid? Plaid is a financial data network that allows customers to connect their bank and other financial accounts to apps they use for various purposes, e.g. paying friends and family (Venmo), transferring money to a robo-advisory account (Betterment), and so on. Say I'm a mortgage V
  3. 3. Working Paper 2 BOSTON CONSULTING GROUP January 2020 lender and I need to verify my borrower's income, I could ask them to give me data from their primary checking account so I can observe their paycheck amount. Plaid helps me connect to 11,000+ banks so I can get this data from any borrower, as long as they're comfortable logging into their online banking account via my interface1 . More than 2,600 developers use Plaid, which is linked to more than 200 million consumer accounts, having grown at 115% over the last 4 years2 . This service is not particularly new, as players like Mint have used screen-scraping to provide web-based personal financial management services for almost 15 years. Other players in this space include Yodlee (owned by Envestnet), MX and Finicity (both privately-held). What does it mean for Visa? Visa's stated rationale for acquiring Plaid is to get closer to FinTech developers who are building fast-growing, next-generation banks, and to accelerate its network-of-networks money movement strategy. Neobanks like N26 and Monzo in Europe and Chime in the US have been growing very rapidly, and Visa has been competing aggressively with Mastercard on being their payments network. Owning Plaid now allows it to create a richer bundled offering and become more of a one-stop-shop to developers, potentially integrating security and authentication as well. It also gives Visa visibility into high-growth FinTechs before they hit everyone else's radar screen. Money movement is a more interesting use case. For example, today Venmo uses Plaid to verify bank account information and ensure the customer has a sufficient balance, but not for money movement which can happen in multiple ways, including ACH transfers and via card rails. With Visa's ownership of Plaid, it now has visibility to transactions that run on non-Visa rails3 . This 1 Many banks like JP Morgan Chase and Bank of America now publish APIs so Plaid does not see or retain the login information; in other cases it does, particularly where Plaid is screen-scraping the account for the required information. 2 Source: Visa investor materials on Plaid acquisition, January 13, 2020 3 This is likely an oversimplification and requires a more in-depth assessment of data flows and data usage policies than in the scope of this article. The simplistic view is that Plaid
  4. 4. Working Paper 3 BOSTON CONSULTING GROUP January 2020 will give it useful insights on how non-Visa payments methods are being used. Visa could also try and displace the rails being used, e.g. Visa Direct instead of ACH. Our view is that this deal heralds the arrival of a 'data network', with Visa setting standards for how data can be shared between different parties. Like with its payments network, expect rules around obligations of data seekers and data furnishers, continued standardization and enhancement of the data stream, and combination of data streams across multiple furnishers. It could also build use cases on top of the network, e.g. income verification, which will involve defining the data fields to be scraped and an algorithm to estimate income based on incoming cash flows over a period of time. Another example is authentication, where Visa can define a 'strong authentication' standard based on bank account information, thereby taking steps towards the creation of a digital identity. The key challenge though is going to be to convince banks to play along and participate in a user consent-based data sharing ecosystem. The macro theme here for Visa is to get access to another type of 'transaction' ecosystem that it can set standards for and monetize. Plaid is an early-stage data network with a limited geographic footprint and significant use-case expansion potential, particularly as open banking becomes widespread globally. Visa does increase its exposure to the broader banking ecosystem, but also gets connected to non-banking ecosystems with use for bank data, e.g. bank account- based authentication. The wild-card and open question here pertains to the type of access Visa has to the data that's collected by Plaid. Data rights in the US are still governed by the maxim 'possession is nine- tenths of the law', and Plaid's end user privacy policy gives it wide latitude on what can be done with the data. It is reasonably safe to assume that post-close, Visa has access to a vast trove of complementary payments data including bank account information and associated transactions. There are many uses for such data - for example, could Visa create a bank-to-bank payments has access to all transactions happening in the bank account it is connected to, given it is scraping that information frequently.
  5. 5. Working Paper 4 BOSTON CONSULTING GROUP January 2020 network (a la Zelle) based on the bank account directory information, and enable widespread access? What does it mean for banks? It is widely acknowledged that the new basis of competition in banking - particularly consumer banking - is personalized insights and experiences. Banks have been investing heavily in these capabilities but still have some ways to go to catch up with FinTechs, who are arguably solving narrower problems (e.g. online trading). Given that customer data is the foundation for these capabilities, the natural question for banks raised by this deal is what they should do as it relates to data sharing. Should they allow their customers to share their data with any provider? If so, should they publish an API for data access? Our view is that this deal accelerates the US moving towards an Open Banking construct and will force banks to move towards a consent-based data sharing world. Banks will likely try and use their leverage with Visa to slow things down, to at least give themselves more time to get ready. We would argue that they should instead identify and build use cases that let them take advantage of access to both in-house and off-us customer data, e.g. for a credit card-only customer, use data on off-us deposit balances to make a rate or fee-based offer to acquire that relationship. There is significant first-mover advantage if we end up in an Open Banking world and even if not, these are useful tactics to acquire new customers and retain existing ones. A potential approach to stepping into an open banking world would be to select a few such use cases and open up core functionality to third-party players. This will allow banks to test the waters while maintaining control, and help build out a partner ecosystem in a methodical manner. They can also test pricing constructs which allow them to charge third parties by the amount of data they download, the number of API calls their components make to a bank's systems, and so on. What does it mean for everyone else? This deal also accentuates opportunities for core banking providers like FIS and Fiserv, who already have deep relationships with Visa. They could be part of the ecosystem that a bank wants
  6. 6. Working Paper 5 BOSTON CONSULTING GROUP January 2020 to build, and could also build standalone applications that support the deployment of new use cases at banks. Given their ownership of acquiring businesses, they could play a similar role with merchants, e.g. build an application layer to allow SMBs and mid-size merchants to get funding for their business, or POS loans for their customers, from their banks. Finally, someone needs to create a second data network, arguably one which is more bank- centric and has higher likelihood of their participation. A natural play would be for banks to drive the effort, in partnership with players like Mastercard, FIS and Fiserv. The latter two bring connectivity and access to the data, which will allow the effort to quickly scale. This will be an interesting space to track over the next few months. * * * Visa has laid down the marker for an institutional data network with its acquisition of Plaid. A lot still needs to happen for this to materialize, but it is no longer possible for US banks to assume that open banking will not arrive at their shores. They need to move fast to seize early- mover advantage and use this as a trigger to fundamentally change how they operate. Inderpreet Batra Steve Mallouk Sushil Malhotra Inderpreet Batra is a Managing Director & Partner in the New York City office of The Boston Consulting Group. Steve Mallouk is a Managing Director & Partner with BCG Digital Ventures, in the firm’s Seattle office. Sushil Malhotra is a Managing Director & Partner in the firm’s New York City office.
  7. 7. Working Paper 6 BOSTON CONSULTING GROUP January 2020 You may contact the authors by e-mail at: Batra.Inderpreet@bcg.com Steve.Mallouk@bcgdv.com Malhotra.Sushil@bcg.com

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