Announced last month, the Visa Inc. (NYSE: V) buyout of API fintech Plaid is historic. Not only for the fact that the $5.3 Billion deal is double the company’s most recent valuation of $2.65 billion, but also because the buyout signals one of the largest corporate commitments to fintech and open banking the financial world has yet seen.
The impact of this purchase could represent a potentially massive sea-change for consumers who, thanks to the proliferation of fintech, are still migrating to online marketplaces and vendors for more sophisticated transactions. This is particularly true in the fintech lending space, which according to Visa’s materials about the acquisition makes up the largest market in the fintech industry, at about $1 billion.
The shift to online financial ecosystems is something Credibly has witnessed first-hand. In a survey conducted among 343 small- and medium-sized businesses financed by the fintech, 62.5% of respondents claimed they did not seek a traditional bank loan before securing funding with Credibly.
But now, with one of the world’s most widespread API providers under the ownership of a major credit card company, the question is: will the buyout foster fintech’s growth and hasten open banking, or will it hamper both?
Opening The Book On Open Banking
While open banking has been a core consideration internationally, with UK and European regulators implementing or considering rules requiring large financial institutions to share this information, the issue has largely been overlooked in North America.
Briefly, open banking is a financial framework by which an individual’s banking and transaction data can be shared with third-party technology platforms and open-source APIs like Plaid’s. Open banking aims to increase transparency within the banking industry and help consumers better organize and control their financial identity.
Fintech lenders routinely utilize financial data that larger banks often take for granted to offer consumers better or more closely tailored financial products.
“Our scoring model aims to more effectively target overall business health and probability of performance (repayment/remittance), coupling cash flow and credit data, economic trends, and numerous alternative data points to paint a clearer picture of the business,” said Ryan Rosett, Founder and co-CEO at Credibly.
But unlike the international regulations that aim to ensure banks don’t hoard their client data, the lack of guidance in the U.S. makes it unclear whether banks or other financial entities are obliged to share their transaction data to third-party vendors.
Visa’s acquisition of Plaid suggests that may soon change. Plaid could represent the first large-scale standardized model for open banking. However, Visa is not alone in pursuing this open banking strategy, and the fight for dominance in finance’s democratized future could ultimately lead to a more fragmented industry than ever.
New Blood Muddies The Waters
Although Visa’s $5.3 billion bet on fintech and open banking represents a huge investment in what is potentially the future of finance, other massive companies are also positioning themselves for this very same future.
In addition to payment platforms like Paypal Holdings Inc (NASDAQ: PYPL) and Square Inc (NYSE: SQ), which both have personal and business lending models in place, Apple, Inc. (NASDAQ: AAPL) has also recently entered the fray by partnering with Goldman Sachs Group, Inc. (NYSE: GS) on its Apple Card. Then, in the last few weeks, it was revealed that Amazon.com, Inc. (NASDAQ: AMZN) is also looking to get into the small business lending space by also partnering with Goldman Sachs.
Many large companies are keen on diving into the online banking/lending space as it allows them to improve their service offering and in turn, customer stickiness while developing a significant revenue stream.
“What sets Credibly apart is our focus on risk management and the customer. Many lenders in our space have focused too heavily on originations and too little on risk, ultimately falling out,” said Bumbales. “And those who engage in predatory lending are only prolonging the inevitable.”
Although the sum total of all of these players in the fintech lending arena may mean that access to capital grows in the short term, the variety of companies vying for dominance in the space could ultimately leave consumers with fewer choices.
Fintech lenders have emerged to fill a niche in the lending market overlooked by big financial institutions or regional banks, usually for loans less than $100,000. But as a greater number of large tech and financial companies compete to define this market and find the most profitable lending model, consumers again risk losing control of their financial information and their ability to find the right-sized loan for them.
“Long term success is going to be dictated by lenders’ ability to both provide financing products that more effectively satisfy the credit needs of SMBs and manage risk for consistent, stable, and predictable results," said Bumbales.
Nevertheless, the fate of fintech will remain heavily tied to the integration and cooperation between legacy financial institutions and APIs and other connective technology that puts the financial products in front of the consumers that need them most, a fact Credibly and other fintech lenders are acutely aware of.
“We solicit information from financial institutions and various other predictive data sources in our underwriting, perform credit checks with all three bureaus, and verify recent cash flow data to remove friction from the application process,” said Bumbales. “And we are also currently working to integrate Plaid - as we have integrated with Plaid competitors in the past.”
These are still early days for the advent of open banking, and it’s not unlikely regulators—or perhaps even banks and fintech themselves—will come together to define best practices. However, consumers should pay close attention to who’s buddying up with who, because the race to the top may be won by the companies who can make the most friends before the competition gets nasty.
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