In this Open Views podcast, Sebastian De Lara, Public Policy Lead at Belvo, interviews John Pitts, Head of Public Policy at Plaid, a leading open finance US company. They discuss the story of open finance in the country, highlighting how it has been driven by consumer demand rather than regulatory intervention.
In this conversation, John Pitts, Head of Public Policy at Plaid, shares how the growth of open finance in the US market has been primarily driven by consumer expectations for more personalized and convenient financial services. He also covers how, over time, banks have formed deep partnerships with open finance companies such as Plaid, signaling their willingness to adapt and meet consumer demands. Additionally, they discuss how regulators are crucial in shaping open finance regulations to protect consumers and foster innovation.
The conversation also covered the importance of trust and regulation in the financial services industry and how open finance is seen as a solution to expand access to credit, particularly for credit-invisible individuals.
Read here an excerpt from this interview or enjoy the full conversation on YouTube or Spotify.
- Sebastían De Lara: It’d be great if you just start talking to us a little bit about how open finance began in the US. What’s the story, where we are today?
John Pitts: I think the most important thing to understand about the US and open finance and how it differs from many other countries is that in the US, this has really been a consumer-driven phenomenon rather than a regulatory-driven phenomenon.
We don’t have open banking in the UK style or PSD2. What we had was a really strong set of consumer expectations for what they wanted their financial services to look like. And it was only after that consumer use reached a critical demand that you started to even get the government to start thinking about what regulation might look like.
Just to give you a sense of what that consumer demand looks like, it’s now approximately one in three consumers in the US who have connected some fintech app on Plaid’s network with their bank account. And that’s just Plaid. There are a lot of other aggregators in the US. It’s a really robust, competitive ecosystem. But that means that we’ve got a really big surge in consumer demand.
- Sebastián De Lara: How was the process to create the relationship with banks in the US for Plaid?
John Pitts: It’s an evolution that’s taken place over time. Going from having to knock to where we are today, which is really deep partnerships with banks in advancing open banking.
Actually, three of the five largest banks in the US are Plaid customers now. They’re not just places where consumers share their data. They are places where consumers are sharing their data into. I think that’s remarkable in terms of evolution because it shows that some of the best fintechs out there are actually large banks once they commit to this idea of what consumers want.
But let me talk about that early stage and where that hesitancy is because I don’t think it’s just banks. I think this actually gets said to the question of regulators and the difference between consumer-first versus regulator-first.
I was meeting with a European official working on PSD2, and one of the things we were talking about was what the scope of data should look like, and why payments data, which as you know is what’s in scope for PSD2, was not sufficient. I started talking about the ability of a consumer to switch their mortgage, to go from one mortgage provider to another. The officials said, “Oh, we don’t do that in Europe. No one ever changes their mortgage. It’s not a consumer use case. There’s no consumer demand for it”.
The reason for that is in some European countries, there’s a prepayment penalty on mortgages, very different from the US market. And that means that it’s very expensive for consumers to switch. But that’s not true in every European country.
And so if your only lens of experience is what you, the individual regulator, or you, the individual banker think is a good open banking use case, you are every time going to limit yourself because you’re going to miss the use cases that people who are not like you need in their lives. It’s one of the reasons I’m so excited about what open banking can do in terms of expanding access to credit.
- Sebastián De Lara: That’s really interesting. In Latin America, we have different approaches to how open finance is being regulated. You have Mexico, we have a pretty good legal framework but are still waiting for the secondary regulation to be published. In Colombia, it’s been included in the National Development plan of the country and they also want expand it to other kinds of data. And then you have Brazil, where the movement has been led by the Central Bank and it’s already mandatory. And there, you’re also seeing other financial players voluntarily getting involved.
John Pitts: Part of the journey on the bank side has been this realization that if where consumers are going is digital, you actually care about open finance quite a lot because you don’t want just the large banks to have access to all of the apps. Otherwise, you’re out of business. You’re not going to have the customer service that your customers expect.
One of the most exciting things that shifted in the US in the last year, speaking of APIs, is that Plaid launched an API framework based on the FDX, the Financial Data Exchange API that we call Core Exchange. In the last year since we launched it, we have partnered with other providers to make that API available for free to over 4,000 banks.
They’re small community banks and credit unions, and their demand for it is not that they want to necessarily build a lot of new services for their customers. Their demand for it to give their customers a great experience, an experience as good as the biggest banks have.
And it’s great to hear that it’s happening in Brazil as well, it’s that realization that this digital transformation is going to be everywhere and you need to be ahead of it, not behind it, because in another year or two, as my CEO, Zach says: “Every company is going to be a fintech company”.
- Sebastían De Lara: Now, also, Plad is moving to this one-stop shop for your financial data, where you can basically open your information and share it in a much easier manner. That’s something that really catches our eye. I don’t know if you can talk a little bit more about this and how it’s being developed or how it’s and where it’s coming from.
John Pitts: This gets a little bit back to how are banks involved in this and how they view the evolution of open finance as well. Because I think there’s often a perception, or there was historically a perception that open banking is just for fintechs. It’s a way for non-banks to get data that banks have and grow their business.
I think that’s actually really deeply misguided and a misunderstanding of what open banking really is. To me, open banking and open finance are really simply the recognition that a consumer’s financial data belongs to them and they can use it wherever they get the most advantage from it.
That means they can use it at a bank just as easily as they can use it as a fintech. They can use it as a vendor, they can use it at an auto body shop. That’s a fantastic use case. I love that idea. But if the consumer is really going to be in control of their data, open banking is much more about what is the hub that the consumer uses to control that data so that it can flow in any direction they want.
If it was just a one way flow, bank data going to fintech data, you wouldn’t necessarily need all the consumer controls that Plaid has worked on. Once you realize that it’s not fintechs at the center of open banking, it’s not banks at the center of open banking, it’s consumers at the center of open banking – you then start building around the consumer as the center.
Rather than thinking of ourselves as a pipe just to serve one part of the market, we want to think of ourselves as a network with the consumer at the center, controlling what they want out of their financial lives.
- Sebastían De Lara: And that’s the real democratization of financial data and financial services in general. How do the regulators come in? You were a regulator at some point in your life. Tell us a little bit about the Consumer Financial Protection Bureau (CFPB), how they get involved with open finance and where things are today.
John Pitts: I actually think regulator involvement is the single most significant leap forward that open finance can have. I think about it like that for three reasons, and they’re all equally important.
One, financial services have always been one of the most heavily regulated parts of the economy. Not just in the US, in every country, the state and financial services are basically inseparable from each other. That’s been historically true for hundreds of years. It’s because the economy and financial services are so deeply tied to each other that there’s always going to be a role for regulation in shaping that. You’re never going to move financial services forward into the digital age, which is, I think, fundamentally what we’re doing here without the government’s involvement as an equal and, frankly, senior partner in the relationship.
Two, the consumer needs to know that they can trust what’s happening when they move into digital space. If you look at the history of tech, not fintech, but tech generally, a lot of consumer mistrust has grown up over the last couple of years because they just don’t feel like they really control their data or the companies they engage with are necessarily fully trustworthy.
Then the third thing is your bank partners and your fintech partners matter and their needs and interests matter, and many of them are regulated. If you are engaging with them and you are not regulated, there is always going to be some uncertainty about the relationship because you’re not on an equal footing with each other. And being regulated solves that. Those are the three drivers for me.
- Sebastían De Lara. One of the main goals of open finance would be expanding access to credit. What is Plaid doing on this front and do how you see it in the US?
John Pitts: When I was at the CFPB, we released a report saying that in the US, there are more than 40 million credit-invisible people, people who don’t have a credit score or have a thin file, and it makes it really difficult for them to access credit. One of the things that was most interesting to me on that report is that the number one way an American establishes their credit history is by going to college and taking out a student loan. And that’s usually the first step. Not everyone goes to college. Not everyone has that opportunity. And if that becomes a prerequisite to accessing financial services, you’re building in a structural divide that is going to leave millions and millions of people outside of financial services.
I think open finance has an amazing ability to solve that by putting consumers in control of their own data because the number one way that small businesses get a loan is cash flow information. And with open finance, the consumer has all of their cash flow information. They can put it in a digital shoe box and take it to a vendor, and the vendor can underwrite them, and you don’t need a credit score.
What’s been most encouraging for me is how quickly the government and other groups have identified this as an opportunity. Starting a few years ago, the OCC, the Federal Reserve, and the FDIC put out a bulletin encouraging their banks to start engaging in more cash flow underwriting. And Plaid has actually partnered with an organization called Finreg Lab as part of a pilot program with another part of the US government to help minority-owned banks and community development financial institutions also do cash flow underwriting to lend to consumers who might not otherwise have access to credit.
I think we really are in a moment here where easy access to data that are in the control of the consumer is going to give millions of people a chance to get responsible credit in a way that they couldn’t before.
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