From building a single application programming interface (API) to connect to bank accounts in 2013, Plaid is now a multi-product fintech giant employing over 1,200 people in seven countries. The company's story is intertwined with the rise of American open finance and fintech, as examining its past and current technological choices reveals.
Zach Perret, CEO and co-founder of Plaid, joined Reggie Young and Matt Janiga on the Fintech Layer Cake podcast to discuss Plaid's early technological edge, the current state of American open finance, and where the sector is heading.
Open finance tech and Plaid: The early days
In the aftermath of the Great Recession of 2007-2010, Plaid's founders had a single vision: to improve consumers’ financial lives. “We had this concept that we wanted to build something to help consumers live an easier, better financial life,” Perret says.
Given their software development backgrounds, Plaid's founders saw the potential that technology offered, but success wasn't immediate. “We had probably this nine or 10-month arc of building products that nobody wanted,” Perret says.
“A lot of people wanted to try to link to a bank account, but the things they built were terrible.”
“When we started to build Plaid,” he continues, “we wanted to create an API for your bank account, and that was immensely, horribly complex. It turns out banks don't have APIs, so you have to help them figure out how to create things.”
Plaid immediately found demand for its product but ran into regulatory gray zones. For starters, open finance in the US was far less defined than in the European Union (EU) and other parts of the world.
“One of the things that we found early when building Plaid was that in Europe, they were planning to make some open banking rules,” Perret says. “But we were wondering whether integrating with a bank account in the US was something that would be protected [or] enabled.”
After some digging, Plaid's team discovered what Perret says was the foundation of open finance in America. “We found that there is this component of Dodd-Frank,” he says. “It’s Dodd-Frank [Act] Section 1033 that had some language.”
“[It] suggested that consumers should have access to a digital copy of their financial data. We were showing up and saying, ‘Hey, we think we can use this to scale a valuable product for consumers.’”
This discovery kicked off several sessions with regulators. “Open banking in Europe is just focused on your checking account,” Perret says. “[In] the US, open finance [encompasses] all of your financial accounts. Once we realized this was the case, I wanted to meet the regulators that were going to do this.”
Perret's foray into Washington was unique at the time. Few companies from Silicon Valley were proactively having these types of discussions with financial regulators. To his surprise, Plaid was welcomed.
“I did this with the CFPB (Consumer Financial Protection Bureau) and a couple of others. Eventually, that led us to hire our first policy person in DC.”
Meanwhile, Plaid was using its technological edge to fend off competitors. For instance, instead of gating API documentation like its competitors, Plaid published it on its website, offering transparency to potential customers. Its commitment to technology was so deep that it even hired people by API.
As Plaid grew, it intertwined itself with open finance and now powers the majority of fintech applications across the US.
Open finance tech is changing consumers’ financial lives
Plaid’s technological choices continue to fuel its founders’ primary mission — helping consumers live better financial lives. Perret says the company’s current product development path reflects this.
Plaid is building its identity verification product set, aiming to speed up Know-Your-Customer (KYC) during onboarding when a customer connects their bank account. Perret credits Plaid's acquisition of Cognito as a critical driver of this innovation.
“The second big area of investment for us is around risk and fraud tooling,” he says. “So once you have a user that's fully signed up, you want to understand if that user is good or bad. [This decision is] informed by much of the data from identity verification and elsewhere.”
Plaid is also building technology to enable better consumer lending. Perret explains:
“A user who just moved to the United States might have a very thin FICO file. But they might have a high income or a high amount of assets, and they should be able to qualify for a loan.”
“And so, we’ve built tooling to help consumers verify their income or their assets so that people who might otherwise fall out of a loan process are able to requalify themselves into it in other parts.”
Given the amount of consumer data Plaid is helping its clients collect, privacy is also at the top of Perret’s mind. To this end, he points out Plaid's privacy portal that gives consumers the ability to view and unlink their financial connections.
Looking ahead: The regulatory picture and fintech adoption
Despite advances in fintech, Perret says Plaid's competitors are still as analog as they come. “Paper is our biggest competitor,” he says. “It’s the loan officer that you’re bringing your shoebox full of documentation that you printed out to apply for your mortgage.”
One reason is the rigidity around core banking systems that puts banks in a tough situation, especially smaller community banks.
“Really small banks don’t have any technologists on staff,” Perret says. “They go to their core provider [FIS or Fiserv, for example] and ask them to build an API. But many of the large core providers support so many different permutations of core. They have many different versions of each core. Then, they have different integrations that sit on top of each version of each core. And so the mess of technical complexity for them to actually upgrade everyone is really high.”
As a result, Perret sees a massive opportunity for startups to help banks launch APIs. “We create a lot of tooling on our side,” he says. “We have some products called Plaid Exchange and Core Exchange that help banks plug into Plaid very easily.”
When asked about regulatory trends, Perret is optimistic. “I've been surprised at the level of engagement of many of the regulators,” he says.
“We’ve changed administrations, we’ve changed heads of the CFPB, yet it’s the same staff members that are continuing to push this forward. And through that process, there’s been a lot of engagement.”
One of the drivers of such regulatory engagement is the continued explosion of fintech adoption and the need to protect new users. Perret highlights examples of non-traditional technology adopters to reinforce this point.
“My mom called me about a year ago to say, ‘I’ve seen this app called Truebill. Now it’s Rocket Money. Is that safe?’” he says. “I saw the Plaid logo in it. I said, ‘Yeah, Mom, you’re using my product.’ And she said that one of her friends who was even older than her had referred that product [saying] that it was a great product.”
However, as adoption grows, Perret points out that the degree of risk entering the system is increasing. As a result, fraud and risk controls will become more important than ever — something he says Plaid is focused on with its products.
Broader uncertainty in the economy is also shifting consumer product choices, Perret says. “We’ve seen a huge pullback in the crypto and investing market. We’ve seen a lot of consumers looking for high-yield savings accounts.”
“The funny thing to me, though,” he continues, “is that not a lot of fintechs offer high-yield savings accounts. I think it’s a matter of time until the fintechs build high-yield savings products and start to use that as an acquisition lever.”
Fintech’s evolution continues
When asked about some interesting sector trends he’s witnessing currently, Perret notes the rising number of vertical fintech opportunities.
“We're seeing a lot of neobank plus payment processing tools pop up for specific niches,” he says. “I saw a company that was a neobank and a payment processing tool for hairdressers, and it was just for hairdressers.”
Perret continues, “Often, they’ll bundle in things like lending, and so you have this all-in-one financial solution for a very specific vertical.”
Perret believes Plaid’s mission is nowhere near complete. “[I] hope that the industry can get together and build tools [that] create a safer financial ecosystem.“Because the trend is towards digitization. Consumers love it. We just need to ensure that we’re in a safe ecosystem as that digitization takes over.”
Hungry for more insights like these into the world of fintech and open finance?
Check out Fintech Layer Cake, featuring guests like Alloy’s Tommy Nicholas, Sardine’s Soups Ranjan, and Airbase’s Thejo Kote.