What happens if Mastercard and Visa gobble up all the data aggregators?
Mastercard’s announcement last week that it is buying the data aggregator Finicity for nearly $1 billion mirrored Visa’s news in January that it had agreed to acquire Plaid for $5.3 billion.
If these deals are approved by regulators, the largest card networks will own two of the largest U.S. data aggregators, which are companies that collect and feed bank customer data into fintech apps like Venmo and Betterment.
These deals would change the banking, payments and fintech landscape. What would the impact be on banks, fintechs and consumers?
The card networks' agenda
The card networks say their motive is to advance open banking and to work with fintechs.
“Open banking is a growing global trend and a strategically important space for us,” Michael Miebach, president of Mastercard, said in a press release. “With the addition of Finicity, we expect to not only advance our open-banking strategy, but enhance how we support and accelerate today’s digital economy across several markets.”
These mergers would undeniably concentrate more power among a small number of already dominant organizations. Visa holds a 60% share of the credit and debit card market; Mastercard has 30%.
Data aggregators have also become more powerful over the years. They are the central hub through which the lifeblood of fintech and open banking — bank account data — is pumped out to all the applications that need it. They are just as central to fintechs, open banking and increasingly, banks themselves, as Visa and Mastercard are to card issuers and merchants.
Early on Plaid, Finicity and other data aggregators snuck data out of banks by logging into online banking with their customers’ usernames and passwords (with those customers’ consent), and screen scraping the customers’ bank account data. Plaid fed that data to fintech clients like Acorns, Betterment, Chime, Transferwise and Venmo, which need the data for their apps to work. Today, Plaid has more than 3,000 fintech clients.
About four years ago, large banks began strenuously objecting to the practice of screen scraping, saying the process was brittle and insecure. Since then, some data aggregators and banks have been working to set up application programming interfaces with banks through which bank customer data is sent from bank to aggregator through a secure pipeline. Plaid has agreements with Wells Fargo and JPMorgan Chase through which it accepts bank account data through APIs, and legal agreements govern what information can be collected, the consumer consent process and legal liability.
Finicity has worked out similar deals with banks, but it won’t say which ones or how many. Intuit, Envestnet Yodlee and MX also work with banks.
A newer competitor in aggregation is Akoya, which spun off in February from Fidelity Investments and is now owned by Fidelity, The Clearing House and 11 clearing house member banks (including the four megabanks and some big regionals). Akoya, like Plaid, considers itself a bridge between the worlds of banks and fintechs, a negotiator and builder of APIs. But because Akoya has the backing of large banks, it can negotiate with fintechs with the heft of that backing. Akoya has not publicly announced bank clients yet.
A lot of screen scraping still goes on, as APIs and legal agreements are not easy to create and finalize, especially for smaller banks with limited resources.
Meanwhile, banks also have begun making more use of data aggregators for their own purposes, pulling in data from other banks and sometimes from fintechs for purposes like giving their customers a holistic view of their finances, assessing creditworthiness of potential borrowers and verifying information in the process of opening accounts.
Acquiring the data aggregators would make Mastercard and Visa the gatekeepers and the toll collectors for all kinds of fintech and open-banking activities.
The United Kingdom's Competition and Markets Authority launched an investigation into the Visa-Plaid deal on June 16. It is seeking comments until July 10. The authority refused a request for an interview to discuss the case.
The U.S. Department of Justice will also need to review both agreements simply because of their size.
Many industry officials said they are bullish about the trend the deals highlight and predict Visa or Mastercard could make more of them.
Steve Boms, executive director of the Financial Data and Technology Association North America, said that “Mastercard’s acquisition of Finicity is the latest sign that open finance is the future of consumer and small-business financial services.” The association’s members include the Alliance for Innovative Regulation, Betterment, Envestnet Yodlee, Intuit, Kabbage, MX, Petal, Plaid, Quicken Loans and TransUnion.
Don Cardinal, managing director of Financial Data Exchange, a standards-setting group that counts Visa, Plaid, Mastercard and Finicity among its members, pointed out that other data aggregators, like Envestnet Yodlee and MX, remain independent. Many consider both companies ripe targets for acquisition.
Impact on banks: Generally positive
These mergers should benefit banks, which have a lot of control over Visa and Mastercard; they're the biggest customers and users of the networks.
“The banks know how big their chunk of business is for the networks and tend to throw their weight around when they really need to,” a former Visa executive said. “Some do it just to remind them that they can.”
Banks have long clamored to have more control over data sharing. Not only do they often object to screen scraping, but even when data is shared through APIs, they seek to limit the types and amount of data that can be obtained and the legal liability if something goes wrong.
Hans Morris, managing partner of the venture capital firm Nyca Partners, pointed out that APIs are expensive for banks to build and maintain and that often banks get little revenue from them. They would like to have rules and controls around who can access their data, the way Apple polices apps in the App Store.
“The banks would greatly prefer that Visa owns this because Visa will be very careful about it and manage the risks and be attentive to the banks’ concerns,” Morris said.
Impact on fintechs, consumers less certain
Not everyone sees banks’ influence over the card networks as a good thing.
“Mastercard and Visa work with banks, and banks control a great deal of personal information and aren't as open as open banking would lead us to believe,” said Brad Leimer, co-founder of Unconventional Ventures. “If more moats are created to control personal financial information, there will be no ability for new businesses to create value around this data, let alone consumers having the ability to cross the water toward new value.”
Leimer pointed out that these two mergers will likely slow down the pace of innovation for the acquired firms, at least until the each deal and all its ramifications are worked out.
Another issue, in his view, is control and lack of choice.
“When large data platforms become larger through acquisition or broader business extension, we lose choices, both in founders of new fintech firms and developers of new financial applications,” he said. “We need to continue to see, at least in the U.S., given how many financial institutions still exist, innovation that helps develop consumer value around savings, income and spend optimization, and long-term wealth creation through investments.”
Giving large organizations control over data could stymie this work, as they are rarely motivated to pursue anything that does not produce a direct profit, he said.
“I remain relatively bullish that Mastercard and Visa can create value from aggregation for their bank partners, but I am less excited about what it means for helping the real economic problems that consumers in the U.S. face today,” Leimer said.
While he said he's happy for the Plaid and Finicity teams, Leimer worries that these mergers will slow the innovation taking place in startups that benefits consumers.
"We need more challenges to existing banking business models, more efficient ways to deliver opportunities to save, to broaden investment, to optimize spend and use of credit," he said.