Fintechs, Data Networks and Platform Incentives

For many fintechs, creating API platforms and partnerships that leverage FI (financial institutions aka traditional banks) data is an opportunity to build sustainable business models and distribution that has eluded many upstarts in the past. Openly sharing customer data might be FIs’ best chance to maintain long-term relevancy in a less-than-friendly and ever-changing

consumer environment. In order for both FIs and fintechs to take advantage of this paradigm shift towards partnerships and data networks, a new “ecosystem-first” mentality must emerge, focused more on value creation.

Why “Customer Choice” Worked

In August 2016, I predicted that PayPal’s new partnership mentality dubbed “Customer Choice” would pay off because the traditional financial services and commerce landscape had fundamentally changed. The reason this strategy has worked is that PayPal realized that data networks, partnerships and a customer-first mindset were the future as I wrote in Give A To Get A Lot:

After the Visa deal, it’s clear that PayPal’s mobile opportunity lies in partnerships through VDEP that will bring its technology (core PayPal, Braintree and Venmo) in-store where 92% of total retail purchases are still happening. PayPal will also be able to leverage its technology (Braintree) on websites and apps where Visa commerce technology is accepted. PayPal will have automatic access to the 14,500 financial institutions on the VDEP network. Paypal now has access to a treasure trove of data. *This is very important*.

While PayPal’s take rate will decrease in the short term as a VDEP partner, PayPal will be able to create better commerce experiences for consumers wherever they are. This will allow PayPal to build consumer-pleasing experiences, both in-store, web and on mobile, that will (in theory) significantly increase transaction volume and revenues on its platform.

In the four years since that original post, PayPal’s revenues have grown every quarter and its current market cap is $246 Billion, up from $43 Billion in 2016.

Consumers have more choices than ever before to decide who to bank with and where to shop. The story of the internet’s rise and dominance of multiple industries, especially in the smartphone era, has been one of consumer surplus. The days of FIs and retailers owning the customer relationship by default are coming to an end.

In the EU, PSD2 (second Payment Services Directive) was instituted in 2015 for sole purpose of removing banks’ monopoly on customer data, making it available to third-parties via highly secured data transfers. PSD2 forced European banks to move beyond their walled data gardens and allow for improved customer experience and more transparency.

Though there is no U.S. equivalent for PSD2, U.S. FIs, fintechs and the Consumer Financial Protection Bureau are carefully watching the performance of PSD2. It’s understandable to see the investment in API platforms and secure data-sharing as an unnecessary change in a system that isn’t “broken”. But the writing is on the wall, FIs can no longer rely solely on internal initiatives and inefficient customer acquisition to maintain and grow their customer relationships.

Using those same tactics in the new internet economy is creating the conditions for market disruption from fintechs and public company neobanks like Cash App. The most viable way forward now is data partnerships that create value for all three parties (consumers, fintechs, and FIs). Google’s new neobank partnerships with FIs like BBVA and Citi is a step in the right direction.

The Next Wave for Financial Technology is Here

Interestingly enough, it was Visa and Mastercard who saw the new wave of data partnerships first and capitalized on it, just as the two card networks did with charge cards decades ago. Unlocking additional financial services and value for businesses and consumers has always been the most powerful network effect for Visa and Mastercard. With the launch of their respective VDEP and MDES platforms, Visa and Mastercard built new digital rails for FIs and fintech to partner effectively across digital touchpoints for banking, payments and commerce.

These new technologies wouldn’t be nearly as impactful without a mutual understanding the trust is necessary and trust can only be built if every parties’ incentives are aligned for shared success. Ultimately, that has always been the lofty view of financial technology, though often not reached. This time it can be different and that will be good for all parties involved in financial technology.