Finicity, Plaid, Tokens and Network of Networks

Summary

  • Primary driver of finicity/Plaid deals is not open banking, but in support of the “network of networks” strategy.
  • The owner of the consumer directory, will rule payments. Tokens are the central battle field for trust networks (and payment network) consolidation as well as new services. 
  • MA lost out on the Plaid purchase, but is likely to end up far better off for it. 
  • The Visa/Plaid deal is likely to fall through as the retain consumer credentials for 5yr (claimed by class action).
  • V/MA will likely own the payment token directory 
    • Visa is leading – 1B tokens issued by Visa (acquisition of BellID/Rambus)
    • Mastercard Track  successfully leads the market in global B2B Least Cost Routing
  • V/MA have substantial hurdles in expanding the directory beyond payments
    • Few direct consumer or merchant relationships
    • Bank and Apple/Google leadership in Customer Identity/Trust
    • Trust is the core of bank risk management (and Bank margin)
    • Network effects decrease transaction costs for established services and increase value (acceptance). However they have the reverse effect on new services.
    • Value/Margin is migrating to the ends of the network and many new networks are forming. 
    • The energy to manage participation in multiple networks is dropping (with Mobile). Enabling specialized networks that cater more finely to precise needs of each node. 
    • V/MA will see substantial growth in core payment volume with continued network effects and the breakdown of Payment silos.

Background

Long time readers my remember a few of my background efforts here 

Given this month’s big news on both Visa/Plaid and finicity/Mastercard I thought it was time for an update. Monday, MA acquired finicity for $825M. What drove the deal? 

  • MA and V were in a bidding war for Plaid. MA lost and this was their effort to maintain parity. 
  • Publicly, the driver of the deals was Open Banking. Finicity provides “API” like access to start ups. For example, helping consumers fill in a mortgage application by using your bank credentials. 
  • Strategically, the driver of the deal extends to a consumer directory to support network of networks strategy. See Ed Kelly quote below.
  • finicity/Plaid enables direct consumer and merchant services. For example, Account Owner Verification and positions the networks to “see” transactions beyond their respective networks.
  • “Future Vision” of Data permissioning/compliance for banks and merchants (great pymts.com article)

Open Banking – Don’t Bank on It

As a guy that ran 2 of the largest online banks in the world (Citi and Wachovia), I have a VERY dim view of “open banking”. Why?

  1. Visa and Mastercard are great because they have a model of shared economic incentives. Everyone knows their role(s), costs, rules, and standards. The operating agreements within Visa/MA took decades to refine. There is no such model in open banking. In other words banks provide all the data (value), and own all the compliance risk. 
  2. Finicity and Plaid screen scrape online banking to obtain consumer information, their paying customers are buyers of consumer information. There are very limited use agreements with the customer (ex permission for Paypal to validate account ownership for linking) AND there is NO economic incentive for the bank.
  3. Open Banking is a EU driven regulatory mandate (PSD2). The ECB’s goal was to make switching banks easier, and provide for common services (example bill pay and budgeting) that would be un-interrupted by switching banks.  While I see the consumer upside, there is no upside for banks in this model. 
  4. Privacy/Regulation/Compliance. I’ve spent 20 yrs of my life in banking and software integration, the other 12 in payments/data. State based privacy regulation (ex CCPA) is forcing all parties with consumer information to review both rights to store, rights to use and rights to share. Banks must contend with the rights they themselves have to use information for their own purposes. Banks have no economic incentives AND regulatory penalties for structuring the sharing of data. The grand vision of V/MA’s acquisitions are to become the clearing houses for such access driven by direct consumer permissions.   

Supporting Story – Visa’s initial proposal to banks was to have one master token for all plaid and all services. In otherwords, no granular permissioning for each user of plaid and each service (ex Paypal Account verification). Every one of the major banks just left laughing..

  1. Consumer credentials and access to banking are the core of trust and risk management. Consumer data leaks can not be easily plugged. Banks have learned the hard way that derivative data develops that is even harder to control. V/MA payment networks were designed by the banks to explicitly prevent them from seeing consumer information (just the BIN/PAN). Even if the Plaid/finicity are firewalled from the core network, these payment services providers will have capabilities to measure risk and broker new services far beyond their previous scope. While the economics on card based payments are clear to the bank, the lack of benefit combined with the privacy and regulatory hurdles makes aggregation very challenged. 
  2. Investor rule #1, if you can’t understand the economic value.. Run away. This is a technology (and regulatory in EU)  driven effort that avoids addressing the hardest issue in permissioned data use. 

Plaid Deal Likely to Crumble

MA’s initial “loss” of Plaid may turn out to be an overall gain as Visa’s purchase of Plaid is up in the air pending a class action suit (see June 10 Bloomberg Law Article). The core challenges of both finicity’s (revenue of $41M – see D&B) and Plaid (revenue ~$60-80M) business are: 

  • Few direct bank agreements (Plaid ~3 in US), and the majority of information is gleaned from screen scraping. Additionally Plaid is accused (in the class action) retaining customer credentials beyond what consumers approved (5 yrs). 
  • Per the Bloomberg article, the primary Issue surrounds the rights and use of stored bank credentials. For example, Paypal was Plaid’s largest customer. I estimate they paid about $10-15M a year for account ownership verification. When you linked your bank account to Paypal, you provide your bank credentials to Plaid and they subsequently logged on and scaped your bank account information. 
  • Banks have Plaid on their naughty list. 
    • For example one top 3 bank found that Plain became the preferred channel for fraudsters looking to verify credentials (after the bank white listed them). 
    • Universally known as the most energetic and egregious screen scraper.
    • Generally speaking, Banks are very supportive of Visa’s acquisition. But for the wrong reasons. They want a “throat to choke” for the previous transgressions.
  • Trust network. The core value in a network is defined by the operating agreements between entities. Unlike the payment network, these services have disconnected the flow of data and the flow of value. How odd to begin a trust network by taking information from banks by directly interacting with consumers (without bank involvement).  Hence Akoya (see blog)

My view is that the complaints within the Class action are legitimate and that the $5B deal will fall through with no impact to Visa (ie MAC Clause). Why? Because the likely remedy is to purge all customer credentials, which would mean Plaid would be required to obtain new permissions to use (or stop their service). 

V/MA – Strategic Drivers (beyond open banking)

Visa/MA objective is to be network of networks (must read digital transaction article). Al Kelly was quoted “Plaid furthers Visa’s strategy for “the movement of funds for any purpose around the world.”  This Interoperability requires a brokering of rules (operating agreements), identity and trust. The challenge in getting V, MA, ACH, EFT, RTP, Paypal, Venmo, Alipay, SEPA, Swift, … all working together is substantial (see my YouTube Video). 

Logically, if someone were to build a “network of networks” you need a master phone book. The first entry in a phone book is an identity. Customer identity is currently decentralized and not normalized. The entity which leads THE DIRECTORY will have a significant consumer advantage, and will therefore also lead the consolidation of existing payment networks.  

For example, Paypal’s “switch” allows them to selectively assume settlement risk on some transactions as they route through low cost ACH (vs Card), or even “switch” consumers to loans (BillMeLater).  The core of this ability is consumer identity and risk management.

Payment consolidation is a big prize, and both V and MA are well positioned. For example, Mastercard Track  successfully leads the market in global B2B Least Cost Routing. Both V and MA have acquired many unique assets in support network consolidation

  • Visa – Rambus/BellID, Verify, Earthport, Payworks, …etc
  • Mastercard – Vocalink, Nets, Transfast, RiskRecon, Ethoca, Truaxis, …etc

Most of these acquisitions enhance existing payment services and aid with network consolidation. As networks scale → network effects take hold. Larger networks become more efficient increasing the value of their core services increases, connection costs drop, and ability to retain each node increases. Payment is becoming a commodity service, and payments specialists functions are being assimilated (as their function MATURES they are no longer special). However, as networks scale, they become more rigid and their ability to create NEW services (beyond payments) diminishes. After all, existing participants connect with a purpose (within an operating agreement). Additionally, trust is domain specific, thus current networks are constrained by BOTH the rigidity that comes with scale and by trust extension.

Story on domain specific trust: 6-8 years ago networks had plans for “offers”. Go to a restaurant and you will get an offer for an Uber. Consumers didn’t react well to this. Why is my bank or Visa tracking what I’m doing??

Investor Note – Unique network dynamic. Competitive markets should drive network transaction costs toward 0 (as in Telecom), however as I outlined in Changing Economics of Payments, investment required to create the “network”, combined with powerful brokers has stymied market forces in payments.  As the V/MA network scales, its margins have INCREASED. Perhaps one reason why the payments subsector has outpaced the entire market in return

Bigger Picture – The Directory

The Plaid and finicity acquisitions are about much more than payments.  As I related to the V/MA exec teams in 2015, both act as the Meta Directory of Commerce. Whereas Google indexed the world’s online public information and leveraged this “directory” function to capture intent and deliver advertising; Visa/MA operate as the meta directory of Commerce, a position of far great value in monetizing real world (off line) behavior. 

Consumer ID is the centerpiece of the switch

  • Visa’s is leading the market here with 1B VTS tokens and the acquisition of Rambus/BellID (now re-labeled Visa TokenID Service)  is THE CENTRAL Consumer ID for US (TCH), Canada (Interac) and Australia (eftpos( 
  • Normally ID tokens are unique for both Access (authentication) and the specific service (Authorization). Visa’s initial proposal to the banks was to have one master token for all plaid and all services. Everyone of the major banks just left laughing.. 
  • This fine grained control gives both the requestor and reciever transparency and decision making on the exchange. 
  • Having access to transaction data (beyond V/MA transactions) provides consumer behavior and risk information in support of any kind of account opening or commerce transaction. This information will allow the scoring of BOTH PEOPLE (identities) AND TRANSACTIONS across networks.  
  • Token control, issuance, and authorization are the heart of the battle and covered in my manyprevious blogs above. 

The cornerstone of bank profitability is risk management (see blog). As this 1970 Wharton paper outlines (Authors George Oldfield, Anthony Santomero) 

Financial institutions exist to improve the efficiency of the financial markets. If savers and investors, buyers and sellers, could locate each other efficiently, purchase any and all assets costlessly, and make their decisions with freely available perfect information, then financial institutions would have little scope for replacing or mediating direct transactions. However, this is not the real world. In actual economies, market participants seek the services of financial institutions because of the latter’s ability to provide market knowledge, transaction efficiency, and contract enforcement.

The Place for Risk Management in Financial Organizations, Wharton, 1970

I can’t find a more succinct paragraph for Bank CEOs to reflect on. As proof, look at the market growth of Alibaba (China/Asia) and MPESA (Kenya). Commerce/Transactional intermediaries have proven to be formidable competitors the the banking led model. Both provide excellent examples of how non-banks quickly dominated historically bank roles.

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