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The new age of Fintech - What you need to know about data aggregators

Earlier last month, news feeds were abuzz about a major acquisition within the financial industry, when Visa purchased fintech startup - Plaid, for a substantial sum of $5.3 billion. Although major news, for the majority of the readers this was the first time they have heard about Plaid, raising the questions of how could this company that many have never heard of before suddenly get such massive valuation.

Despite the obliviousness of many, chances are that if you have ever used any sort of financial app, you already are Plaid’s customer. Plaid is one of the key players among the Financial data aggregation companies - which, through partnerships with banks and other financial institutions, have direct access to consumers’ financial data. Since its foundation, Plaid has been rising to the top of the fintech industry, using data aggregation techniques, such as screen scraping and APIs, to gain direct access to consumers’ financial data, cleaning, categorizing and supplying the acquired data accordingly. What Plaid has done is it has taken a key position within the world of Fintech, acting as the connecting link between fintech startups and banks, with its services used by a number of companies, such as Venmo, TransferWise, and Level Money, utilizing Plaid’s software to power their services.

This key position means that Plaid has acquired a crucial role in the functioning of the entire fintech industry, being the prime supplier of financial data. What Plaid and other Findata aggregation companies did, is they have established partnerships with a wide array of financial institutions, gaining direct access to the data of consumers of those institutions - data that is used by a host of Fintech companies offering various financial solutions to prospective users. This enabled the latter to benefit from the readily available and well-categorized data that is supplied by the Data aggregators, with no need to seek connections to all the banks individually, which would otherwise be a lengthy, costly and rather inefficient process, cementing data aggregators in a luxurious position within the fintech industry.

How do Findata aggregators work

In order to do what they do, data aggregators establish partnerships with banks, as they require direct access to consumers’ financial data. When a consumer uses a Fintech app, it requests to be connected to the consumer’s bank account with relevant login credentials. Unbeknownst to many, it's not the bank’s software that the consumer is interacting with at that time, but instead, the aggregator, which, using a dedicated software, logs in along with the consumer, and searches for and catalogs the relevant data from the screen, sending it back to the aggregator to be analyzed and stored accordingly - a method referred to as screen scraping.

Yet screen scraping is nowadays seen as a rather rudimentary method and is being gradually phased out in favor of more sophisticated methodology - APIs. APIs are guidelines for Bank software and Data aggregator software to interact with each other, giving the latter direct access to the financial information of Bank’s customers. This is done either through the Bank's internal API or more commonly through a partnership between banks and data aggregators.

Regardless of the methods used, the accumulated data is cataloged and stored in a single place for various applications. Store data is ranging from the account balance information, cash flows, spending habits, budgeting, etc. and It’s the accessibility to such data that powers a wide range of fintech apps, which provide numerous financial solutions to users, such as quick transactions, financial advising, and lending.

Wolf in sheep’s skin?

There is one thing to keep in mind about the whole ordeal though. As data aggregators gain more and more access to our financial information, they have a free range of actions as to what to do with the information, including sharing or even selling it. What’s alarming is the lack of awareness regarding this, as the majority of the consumers are unaware that data aggregators can store their login credentials, and only about 20% know that data aggregators have continuous access to their information until such access is directly revoked.

The argument now is on the matter that consumers should have greater control as to how their financial data is accessed. This calls into action the introduction of greater regulations of the field, to establish ethical and legal guidelines on how data is accessed and stored safely. The EU has Payment Services Directive II, which established such guidelines for third-party players’ access to consumers’ financial data, yet the U.S. has a market-centric approach to the subject, with the financial data of consumers is continuously accessed and stored, with them being largely oblivious as to what goes down behind the application screen.

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Konstantin Rabin

Konstantin Rabin

Head of Marketing

Kontomatik

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18 Aug 2015

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Warsaw

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This post is from a series of posts in the group:

Fintech

Fintech discussions and conversations around the development of fintech.


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