For decades, technology, regulations, and dissatisfaction with the status quo have formed a powerful triad, driving payments innovation. This triad is fueled by investors and innovators seeking to disrupt and legislators and agencies seeking to enforce compliance, increase transparency, and enhance fairness.

In this episode, John Pitts, Head of Policy at Plaid, sat down with Yvette Bohanan to discuss open banking and its potential to change the finance industry’s playing field: How consumers manage their personal financial lives, how financial service providers compete, and what this means for businesses. Listen to hear how, once again, the triad is at work reshaping the payments industry.

 

Yvette Bohanan:

Welcome to Payments On Fire, a podcast from Glenbrook Partners about the payments industry, how it works, and trends in its evolution.

Hello, I’m Yvette Bohanan, a partner at Glenbrook and your host for Payments on Fire. In this episode, we are discussing open banking and its potential to change the finance industry’s playing field, how consumers manage their personal financial lives, how financial service providers compete, and what this means for businesses. We’ve danced around this topic of open banking and the promise it holds for pay by bank many times over the years on this show. In June of 2023, for example, we sat down with Eric Shoyket, CEO of Link Financial Technologies, to discuss whether or not pay by bank would become mainstream for consumer to business payments. More recently, we spoke with Trevor Nies, Global Head of Digital at Adyen to discuss the possibility of pay by bank competing with cards.

But open banking is so much more than pay by bank, and it’s been a long, hard road just to get to where providers of these services are today. Early pioneers of the notion that consumers could authenticate themselves and validate their bank accounts with a non-bank included companies like Yodlee, which started back in 1999, by using screen scraping technology to glean account information. Over time, more providers were on the scene and banks eventually began creating programmatic interfaces, proprietary or based on frameworks like OFX and OAuth, to make the exchange of information more secure. I think one of the most interesting turning points in the relationship between banks and these companies was when banks started investing in them.

We’ve also seen regulators who are intent on providing consumers with control of their information and access to more competitive financial services mandate open banking. For example, you can look at that in the payment services directive, or PSD2, in Europe. So for this episode, I’m delighted to have the opportunity to crack open this topic even further with John Pitts, Head of Policy at Plaid, one of those early pioneering companies that remains the leader in this space. John, welcome to Payments on Fire.

John Pitts:

I am so happy to be here. It’s been my burning ambition to be on this podcast, if you forgive a pun in the first two minutes, or two seconds.

Yvette Bohanan:

Oh my goodness. I’m so glad. It’s like a professional payments bucket list that you have in your back pocket or something?

John Pitts:

It is. This, and to initiate a wire transfer from country that operates on Swift. That one is a longer ambition for me.

Yvette Bohanan:

My husband and I have been trying to figure out how to get around to all of the baseball stadiums in one season. You’re much more ambitious than we are on this front.

John Pitts:

You have to have goals, keep things fresh.

Yvette Bohanan:

How many countries have you initiated a wire from?

John Pitts:

One. The United States. So it’s a long list that I have to go on here.

Yvette Bohanan:

Fantastic. Well, good luck to you.

John Pitts:

Thank you.

Yvette Bohanan:

Good luck to you and I’m glad we could at least clear this off so you have time to fully concentrate on that other goal. You have had an exciting, exciting career. The more I listen to you speak and the more I have a chance to talk with you here and there, I’m just enamored by what you’ve been able to do. Can you talk a little bit for the audience about your career journey and how you ended up in this very cool role at Plaid?

John Pitts:

Sure. I started my career as a lawyer, which was great in some ways, not great in others, and I had sort of always had an itch to go from legal work into policy work. The good news/bad news was I started my career just a few years before the 2008 financial crisis, and so that was very bad news for a lot of people and for the economy in general. But one thing came out of it that I think was a very good thing, which was the creation of the Consumer Financial Protection Bureau, a sort of once in a lifetime, from my perspective, opportunity to build out a new financial services regulator and in particular one that was focused on non-bank financial services. They cover banks and non-banks, but I think the big innovation with the CFPB was their scope of coverage in non-bank, which I think was prescient by Congress because one of the things we’ve seen post 2008 is a real growth in non-bank financial services as a critical part of the mix.

I got started at CFPB in a funny job, intergovernmental affairs, which was responsible for getting parts of the government to work together, which does not always happen as much as you might like it to, and particular with the CFPB, there were hundreds of statutory authorities that were transferring from one agency to this new agency and also a number of new powers. Some of those powers were also shared by other agencies or by the state attorneys general or state banking regulators, and so figuring out how do you make all of this work together was an immediate and deeply interesting challenge. About four years into my time there, I won’t say we had solved all of it, but we at least had a working cadence going and a new issue started popping up, which was there’s all these new financial services and we need to figure out how they fit into the regulatory framework because a lot of them didn’t cleanly fit anywhere.

I mean, we are still in 2024 figuring out where cryptocurrency should be regulated, and that’s quite a ways later. One of the things I noticed as I started working at CFPB and with other agencies to figure out how we were going to either regulate or not regulate these new products is a lot of them depended on one single thing, and that was a consumer being able to access their financial data where they were holding it and share it with a company as a starting process of getting that financial service from them. So very easy example is Venmo. It needs your accountant routing number so that it can move funds from your bank into your Venmo wallet, and then you can use it for peer-to-peer transactions. I realized that there was a provision in the CFPB, Dodd-Frank Section 1033, that says consumers have the right to access their financial data. That’s what all of these companies were relying on. It was about 75 words long and there was the power to do a rulemaking on it, but no rulemaking had ever happened.

The more I looked at it, the more I realized if there was ever a really robust movement in this direction, it would fundamentally, in my mind, reshape financial services because the control over financial data, as you know, payments is at the end of the day really just information and control over that information, changing the rules of how that information flows through the system is a really deep structural change in the ecosystem. So when the opportunity came along to join Plaid as the starter of a policy team here to work on those types of issues, I jumped at it because I saw this as sort of an opportunity to work with a company that I’d seen come up over and over again as one of the leaders in providing this data access that was starting to shape what this ecosystem might look like in a world where financial data was really in the control of the consumer and able to be used in multiple different places.

Yvette Bohanan:

And right, you are in my opinion. So let’s sort of roll this back. When you look at the evolution of open banking as it’s described now, this access, from its earliest beginnings until today, to say that the technology and the stakeholders have evolved feels like this tremendous understatement. How do you think about the evolution in the context of the financial services landscape? You’re painting this picture back in 2008 in the United States, but this is even bigger than the U.S. You guys have plans operating outside of the U.S., right?

John Pitts:

Yes.

Yvette Bohanan:

So when you think of the whole sort of evolution, how do you think about it coming into today and looking forward a little bit?

John Pitts:

So I think the biggest thing for me is the sheer pace of growth and change in the technology of open banking and what has come from it. I think it’s actually helpful to start with a piece of context here, which is ACH started operating in 1972. FedNow was launched in 2023. That was 51 years later, and FedNow has not replaced ACH, not even close to replaced ACH, right? So that is a 51-year time period for a fundamental shift in technology for payments in the United States, but it isn’t even a complete shift in technology. As a point of contrast, when I started at Plaid about five and a half years ago, 100% of data access worldwide, because there was open banking happening, it was largely happening through a technology called screen scraping where a consumer would share their credentials and a third party would access their account on their behalf, a hundred percent of data access was screen scraping.

In the U.S. today, five and a half years later, roughly 75% of plaid’s data access is API based data access. The CFB’s proposed open banking rule would require that all data access in the United States be over API by 2029. So that is a 10-year window from when I started at Plaid, a hundred percent screen scraping. Not just us, everyone. Not just U.S., globally. That was it.

Yvette Bohanan:

It was “state of the art”, let’s just say.

John Pitts:

That was the state of the art, that was the core technology. In 10 years, we will have moved to a completely different core technology and one that is, in fact, fully replacing the earlier technology, not FedNow and ACH running in parallel. What’s really interesting is that transition has not just happened in the United States, it’s happening in every single market. So the UK is a hundred percent API. Europe is moving towards a hundred percent API. Australia, Singapore, Canada is making their own push to API transition. So I take away two things from that. One, that speed of sort of transition from the regulators is actually driven by consumer demand in a way that other core technologies have not been, in that in the United States, open banking truly already is ubiquitous even without a regulation in place. It is over a hundred million consumers are using open banking technology.

Whether they think of it as open banking or not, they are doing it, and so that demand really forced a pace of change in the technology to make it fit for purpose and better at a rate that I think is pretty incredible globally. The other thing that it tells me is that on digitally native financial services, and I would contrast that from something like the payment rails where up until even now, that still is something that is really an analog process for a lot of people starting with a check, but even going in to initiate a transfer, it still is analog for a lot of people as opposed to open banking, which is essentially a digital only. That means that the technology has moved from the pace of change of analog to the pace of change of digital, which is a much, much more rapid baseline. I mean, I think if you talk to tech people, the idea that we transition from screen scraping to APIs in 10 years, they’d be like, “Oh god, that’s really slow for technology.”

Yvette Bohanan:

Yeah, absolutely. That’s like …

John Pitts:

But it’s really fast for financial services, and so I think we’re entering this new era where the pace of change of core financial services technology as financial services becomes increasingly digital is going to accelerate, and regulators and market participants both need to be ready for that much faster pace of change and have the right people in place to be able to manage that pace of change and be successful in it.

Yvette Bohanan:

Let’s kind of hit the third leg of the stool here real quick. So we’ve got the regulatory, we’ve got the tech and the tech providers. The consumers have to feel comfortable. You mentioned consumer demand for this, or acceptance. What’s the biggest change you’ve seen in the consumer side of things as you’ve been in this space?

John Pitts:

So I think there’s two big changes. The first one is how attuned consumers are to how their data is being used. I don’t think that is a financial services only thing. I think there’s been a much greater increase in awareness from technology companies in general that you might have a lot of your data out there and you really should be in control of it and should be aware of where it’s being used and how it’s being used. Policymakers have made a shift as well in response to consumer sometimes outrage over some of the ways their data were used by others to focus on that issue as well. So that’s one of the reasons why in this shift to API, it’s actually great for consumers because it allows Plaid and others to actually build better dashboards, better transparency, better visibility for the consumer on how their data is being used.

One of the things that I remember from a few years ago at Plaid, this is going way, way back in the way back machine, data access platforms and networks like Plaid weren’t always visible to the consumer. A lot of the times, the app that was using a data access network to get data, it was happening as a technical service provider behind the scenes. You never saw the name. We made a decision to actually put our name front and center so the consumer always saw Plaid is doing this, Plaid is accessing this data and giving it to Venmo, giving it to Cash App, giving it to Betterment, whoever it is. There was a big question in our minds of whether consumers would reject that and say, “oh, I don’t know who this company is, I don’t want to do this. This is not who I was wanting to do business with.”

What was interesting is the opposite occurred. Consumers were more comfortable with that additional disclosure, knowing that extra piece of information about who was involved in the data access actually gave them greater confidence in doing it. We’ve actually seen survey data in the last two years saying that that is increasingly important to consumers to know who’s in the full chain of custody and their financial data and gives them more confidence in navigating their financial life.

Yvette Bohanan:

That’s just a super, super relevant example of trust and brand. We talk about this all the time in payments. Payments are about trust, whether it’s asynchronous or digital, establishing that feeling of trust, and it’s kind of where I was going with this. It’s a perfect answer and it’s a perfect anecdote for the importance of branding. You built that trust over time. Do you survey people to see do they really understand what Plaid’s doing now as a brand?

John Pitts:

It’s such a great question. Thank you for asking. We do survey that and they do recognize it, and I have the pleasure of this informal survey process. So I was walking around DC where I live with my family, gosh, this was like nine months ago, and we were trying to find our way down to the waterfront. I won’t get into the long story about why we were lost going through some 1950s highway overpasses and underpasses, but we ended up finding a couple from Texas who were also trying to get there, and so like lost wanderers, we paired up into a group and we tried to navigate together and we were talking and one of them asked me what I did and I said I worked for Plaid, and he said, “Oh, you’re that company that connects my small business to my bank account. I have a bone to pick with you because you didn’t work for me the other day.”

I was like … so in some ways it was great feedback because one, it shows that this random person understands the role that we’re providing, and two, gets upset if we’re not working up to his expectations. That to me is a foundational piece of that brand and trust that you’re talking about is you can’t build that without creating an expectation of is your experience going to be safe? Is it going to be reliable? Is it going to be good? Then once you’ve established those thresholds, you have to meet them every time or else consumers are going to be disappointed. That is both the pro and the con of that branding and trust element is you have to set the expectations for yourself and then you have to always meet them because otherwise you will have a disappointed customer.

Yvette Bohanan:

Absolutely. Absolutely. No, I thought that’s great [inaudible 00:17:59], and you found your way eventually.

John Pitts:

We found our way eventually, and I also then got home that night and put in a ticket for our engineering team to check if he was at a Texas community bank, and they were one where we hadn’t updated our connection to them in a couple of months, and so there was a bug in it and we fixed the bug and made sure that he was going to be able to connect the next time.

Yvette Bohanan:

Wow. Wow. Wonderful story. That’s fantastic. So this is open banking, then we go to pay by bank, and I want to hit on some of the other applications too eventually here, but let’s zoom in on pay by bank for a second. From your vantage point, what are the foundational elements needed for pay by bank to be successful, lime really successful? I’m going to qualify it within the United States maybe.

John Pitts:

Because it’s already successful in other places, right?

Yvette Bohanan:

Just to make the question harder.

John Pitts:

Have you ever felt like maybe you’re operating in one of the more backward payment landscapes globally?

Yvette Bohanan:

Oh, that hurts. That hurts. But yeah, a little bit sometimes.

John Pitts:

I’m going to answer this question but with some real caution because I think you know the answer better than I do so I would love to hear your thoughts on this and also maybe you can score me on whether I miss anything. But to me there are three fundamental elements to pay by bank being a success. The first one is the recipient of that payment needs absolute certainty or something close to it that the payment is going to settle. It is no good putting a ukulele in the mail to someone who has ordered you it from customukuleles.com where I shop all the time if they don’t think that the money that you’re sending them is actually going to show up. The second thing that I think is required is the payment credential, whatever that is, has to be available regardless of where you bank and regardless of where you are shopping.

That’s a really big network problem, right? Because the one thing I can count on with cash … it’s actually funny, you can’t even count on this with cash anymore. The one thing you used to be able to count on with cash is that it worked everywhere. You can now increasingly count on credit cards or debit cards as effectively working everywhere. If pay by bank does not work everywhere, and that means with whatever bank account you have and with wherever you are trying to make a purchase, that’s not going to be enough. The third thing is this critical consumer trust element, and that gets into elements like dispute resolution, how you manage fraud, how you manage account takeover, how you manage all of the things that could erode consumer trust and confidence in that payment mechanism.

What really excites me about this moment in the U.S. is I think two legs of that stool are in the process of being solved by the end of this year. On the settlement side, you actually already on ACH have something close to a hundred percent confidence of settlement, and that’s because there’s been some innovations of guaranteed ACH that providers are making available that effectively reduce the ACH risks to almost zero. With FedNow and RTP from the clearinghouse, you really do bring it to zero because you now have a push payment that is irreversible and where the funds settle instantly. So that part feels close to solved.

The second part is the access to the payment credential, and this is where open banking becomes critical, because the CFB’s proposed rule says that every data provider must make available the account and routing number or a tokenized account and routing number that allows a consumer to initiate a Reg E payment. That’s the payment credential and that will be a required thing everywhere. You have to solve the other side of that network problem with the merchant acceptance side, but you’ve got the ubiquity of the payment credential on a path to solving. That just leaves that last critical element, which is sort of the trust and consumer protection side of it. I think that one, I don’t see anything in the next six months that is a come from on high solution to that problem. I think that one is going to take more work and more iteration and industry leaders coming together to figure out what are the right ways to make sure trust and safety work well in pay by bank.

But even having two legs of that stool solved for in the United States feels like a massive opportunity for a new payment rail to truly emerge in the ecosystem. What do you think? What are your preconditions? How far off from each other?

Yvette Bohanan:

I think that’s right actually. We’re not too far off, which is, I guess, good overall.

John Pitts:

It reduces the drama and the conflict that people listen for, but …

Yvette Bohanan:

I know, I know. I hate to disappoint. We’ll keep asking questions just to see if we can find some drama here. I think one of the things that’s interesting to me is a lot of times when you look across the globe and you look at where this stuff is going really well, we always talk about with fast payment systems and that having this alias directory set up and then there’s different ways to do that and those are great and they’re powerful and we actually have one in the United States with Zelle that works pretty well and it allows this sort of mapping to a publicly known piece of information, I think what’s interesting about this other angle that you’re bringing up with this proposed regulation is you don’t necessarily need an alias directory. I think that’s extremely powerful.

It’s sort of like it’s removing a little bit of something that could be helpful but also could be a speed bump if you’re waiting for it and waiting around for it by saying, you put in the request, you can do this in a moment in time. You can make this stuff work instantaneously. I think there’s a lot of things implicit in the regulation that it doesn’t come right out and say it for the United States, but it’s kind of different when you start to think about it a little bit more deeply and it’s a little bit more liberating than maybe some of the other models that are out there. Hopefully that kind of gets us to where we need to be faster in terms of options for people.

John Pitts:

I couldn’t agree more and we should talk a little bit later about the difference in approach in the U.S. versus other markets and what that might mean, because there has been this baseline of the U.S. being a largely unregulated open banking market where consumer demand happened first versus other markets where regulation happened first. But I want to touch on that directory component because I agree with you, the way the rule is set up, it does seem like you might not need it. On the other hand, the data elements that are required by the rule, and this is where the open banking rule really is … while payments, I think, is one of the critical killer apps that’s going to come out of it and is incredibly exciting, it’s much broader than that and the impact on consumers is much broader than that, and so one small element of that is among the data fields that must be available for a third party to access with consumers permission is the consumer’s name, address, phone number, email.

That lets you, if you wanted to, start taking some of those elements and putting together a directory service on top of it for the instances where it would make a lot of sense to have that directory service. I think you’re right, that the way the regulation is shaping up, it’s not necessarily a prerequisite, but the elements are there for people to be able to build those services and those technologies on top of it when and if it makes sense and when the consumer wants that to happen and wants to be part of something like that. So I think there’s a lot of flexibility baked into this rule that lets you go much bigger than payments and start building things in terms of identity, in terms of credit on top of that, that will really look different than a lot of the other open banking frameworks that we’ve seen in other markets.

Yvette Bohanan:

I think that’s true and I think it’s going to be a little bit of a double-edged sword if that happens, like everything in payments, and life, but I think the idea of using it to sort of leapfrog us into getting into this space a little bit faster than waiting around for in the fullness of time someone collecting all this stuff and figuring it out is pretty powerful, and it’s been a point of contention. I mean, I had folks who were regulators in one of our public workshops when I first started at Glenbrook, so a little over five years ago, and they were coming up asking my opinion on this specific item because they were debating who would control the directory. Should it be centralized controlled by the government, which some models out there are, and if you have a really strong central bank with centralized management of the network around this, it makes a lot of sense.

But then there was a lot of, “No, no, no, no, it should be decentralized, we’re the U.S., we’re not that, we’re not this”, and it was holding things up I think a little bit. I mean, there’s just a few really, like you said, fundamental things that we put in front of ourselves and then we call them a roadblock. So trying to remove that for ourselves is kind of an interesting angle to this regulation and when you read it that way, you see a few things like that in here, kind of planted in here.

John Pitts:

That is one of the areas where I actually think the U.S. has been very good and better than other markets in driving that sort of iterative testing approach to things without the top down. Now, I think there is a trade off. The ubiquity of picks in Brazil is because the government pushed down a very good single point of view on how something should work with a strong central bank mandating it on everyone. I think I’m frankly just slightly a little bit more small C conservative when it comes to these things in that I get worried that if you look at Brazil and say they did it right and therefore every country, if they did a strong central bank push down, they would also get it equally right. I’m actually not sure there’s good evidence for that. I prefer to have multiple people grinding away at the same problem at the same time to see what the best solution is.

One of the things I think is marvelous about the way the CFPB crafted this rule is while it sets some basic guardrails for how open banking is going to work, they’ve left an enormous amount of space for industry to figure out the details of it and make it work, in some cases explicitly saying, “We’re not going to tell you how to do this. We’re just going to tell you what needs to get done and we are going to leave it to industry to figure out how they want to do it.” The data format for how you access and retrieve that data, what those APIs look like is the most prominent example of it, but it’s not the only one, and I think there’s going to be an opportunity for a lot of companies to come up with different approaches to things like directory services and we’ll get the benefit of seeing which one actually works in practice in a complex financial market like the United States as opposed to put all of our chips on a single bet and hope it’s a winning bet.

Yvette Bohanan:

So going back to your point, I think there’s plenty of examples where a top-down approach on a lot of new systems has not worked and it’s kind of bulked and there’s a whole bunch of reasons. It’s a whole nother podcast series probably on why all these things didn’t work versus when they do. It’s actually the more notable example when they work really, really well. I think Brazil’s done an incredible job with thoughtfulness and intent and design and public private partnership and all kinds of things and a little dose of muscle in the regulatory side of stuff. I think India has done incredibly well. There’s a lot of great examples, Thailand and others out there.

The other side of this too, we are sort of dancing around the services and the capabilities and who has the best director and there’s opportunities here. The whole network effect of the economics sort of reshapes on this stuff too, and that might be another thing that people often cite that that’s holding us back is there’s other systems that are more lucrative or more ingrained or whatever, and that’s kind of keeping us from moving forward here. But it does seem like there are new revenue pools for everybody, pretty much all the stakeholders if they embraced it.

John Pitts:

I think that’s right. I think there’s two things that are interesting in the last year that I’ve seen. One is the degree to which traditional payments companies are getting into open banking. You just recently saw Visa launch Tank in the United States and also launch a new product that allows credit card, debit card, even pay by bank to operate off of the same credential with the consumer dynamically switching wherever they’re using it. You’ve got a MasterCard partnership with JPMC on pay by bank, MasterCard bought Finicity. So a lot of these sort of traditional open banking companies have partnered up with legacy payments providers as those payment providers move into this and sort of lean into it as this is going to be a new area of revenue.

The other one that’s I think more interesting to me in some ways is if you look at community banks and credit unions. When we think about card-based payments and think about interchange, I am not even going to get into the big fights over interchange happening in Washington DC right now because they basically are always happening, but those fights largely focused on a handful of institutions that are the major card issuers. Debit is a little bit more universal in that that stretches much further down the long tail of financial institutions. But when people talk about, “Oh, Americans love their points and they’d never give up their credit cards”, we also have to be realistic about that’s not every American. There are a lot of Americans who do not have credit cards, and there are many more banks that don’t participate as card issuers than there are banks that do participate as card issuers.

So the opportunity for a community bank or a credit union or even a regional bank to both participate in an area of innovation, bring a new option to their customer about how they make a payment and participate in an area of revenue sharing that they haven’t been able to before because it’s been largely the domain of the largest FIs in the payment space I think is actually really, really interesting and reflects one of the behavior changes we’ve seen particularly in the last year or two from consumers, which is consumers increasingly thinking of their primary bank account not as necessarily the bank account where their direct deposit is going, but the bank account that has the most apps connected to it.

The fascinating thing is that those accounts are not always bank accounts. So of the 20 financial institutions on Plaid’s network where consumers are treating them as primary accounts that they are connecting their apps to, five of those 20 are actually fintechs. Those consumers are viewing those fintechs as their primary account for data because it’s got the most apps connected. I think that’s a huge opportunity for those smaller financial institutions to be the hub of their customers’ financial life, everything from savings to personal financial management to investing to payments. The amazing thing is whether or not they provide that service themselves because they are from a holistic point of view providing that bundle of services to their customers in the form of the customer being able to easily add on a service from someone else to that bank account and make that bank account truly a platform that they use for their full financial life.

Yvette Bohanan:

Right. How do you get the banks back to doing what they do really well, and then how do they create this network? I think to me this whole thing feels … you’re articulating it so much better than I have, but again, agree with you, sorry, no controversy or contraversy depending on which side of the pond you’re on. The thing is you keep hearing this sort of fear and loathing scenario when people say open banking. It’s sort of like, “Oh my gosh, once these things open up and we all have to open up, then people are just going to compete for my customers and it’s going to be so easy for them to take all of their information and just erode my customer base essentially if I’m a bank.”

To me, what you’re describing is the exact opposite. You can become this magnet of here’s your money and here’s all the ways we’re going to help you access, use, spend, invest, whatever. I don’t know if this is the American version of the super app that could happen actually here if this works. A lot of folks have taken a run at that in different forms, but do you see a distinct difference between banks leaning into it, maybe going in that direction, and banks pulling back and having that position of anxiety, if you will?

John Pitts:

I do, and it’s one of the things I talk with bankers the most about is where they are on that spectrum and how they’re thinking about it. I would say on one end, you’re exactly right. There are the folks who are concerned that this is something that’s eroding my business model or they’re just concerned that this is yet another compliance thing that I have to do and it’s going to cost me money and it’s not going to benefit me in any way. We’ve also seen some financial institutions that are very explicitly saying, “This is a necessary opportunity for me. I am not going to scale up … I’m never going to be part of the Zelle network”, for example, “But my customers want to be able to send money instantly to their friends, and so it’s imperative for me … I can’t onboard new customers …”

It’s actually, unsurprisingly, we’ve seen this trend most for financial institutions that tend to cluster around college campuses, whether they’re the state college credit union for that state college or just have a marketing strategy where most of their new customers come from freshmen who are going to college and need a bank to handle their financial lives while they’re there. Where they are actually coming to us and saying, “We can’t sign up new customers unless we can guarantee that they will be able to connect the following 10 apps to their bank account”, because that’s how they’re already seeing the bank account. I love your super app example. I actually think because America always is fiercely independent and needs to do it its own way, I actually think the super app in America is going to be sort of a very personalized, every consumer is sort of pulling together their own super app based on what they want from a pretty long menu of options of services that are out there with the bank account as the hub for that super app and how they think about it.

So what we’ve seen behaviorally is that sort of individual transition. It is much more prominent in consumers under 35 or so. That’s where the very strong uptake is where you start seeing the average consumer in the United States has three apps connected to their bank account. Once you get under 30, it starts getting closer to six. Once you get under 25, it starts getting higher than that. That to me is indicative of the direction things are going.

Yvette Bohanan:

I’m chuckling because I’ve sat in so many meetings over my career where they talk about teaching financial literacy to kids and all we had to do is put dot dot dot through apps.

John Pitts:

I am old enough that … so my son is a Mac user. I’m a Mac user. This was the year, he’s 13, where suddenly I could not tell him how to use his Mac anymore or his iPhone. He was telling me how to use my iPhone and Mac. I do think that is something that is missing from the financial literacy conversation is if what you are defining as financial literacy is can the kid open an Excel spreadsheet and balance their checkbook on it because that’s what financial literacy was when you and I were younger …

Yvette Bohanan:

51 years ago when ACH launched.

John Pitts:

Yes. No, they probably can’t. Do they need to? Arguably no, because they have access to and are using better than we are other services that actually give them much greater financial utility in their lives, which is ultimately what financial literacy is for. It is not for the sake of pure knowledge in and of itself. It’s for your ability to successfully navigate difficult, hard, unclear financial choices in your life and the ubiquity of access to services that help you do that is, I think, one of the benefits that’s come from open banking and is going to get only bigger as time goes on.

Yvette Bohanan:

Yeah, I would agree. I think the other thing, we’re sort of saying this comparative of ACH launching in the ’70s and FedNow today and that sort of shift in terms of an introduction of a new system, which doesn’t happen that often at a macro level, but it also shows the staying power of direct access to a bank account and how powerful that is. ACH, we’ve said this a few times on this episode, it’s hotter than ever after 50 years, right? It’s like hello, and it’s being used in this application, it’s being used in a lot of ways. Same day is growing. We’ve had Michael Heard and others talking about that in the last couple of years as it just continues to build.

I think the other side of it is when you look at the merchant complaint, merchants are trying to get paid, they’re trying to make a sale. Even in really sophisticated environments where merchants are offering co-brand cards in that, one of the biggest pain points is having a customer that they know is a good customer that has been buying with them for 10 years, apply online for that co-brand cart and get declined. And they’re like, “But they’re a great customer for me. Why are they getting declined? Why can’t I … and I can make this sale and actually I could make more than what’s in the cart if this actually would go through.”

So you have these different stakeholder perspectives where you can say you can choose to look at this in one way and you can have a lot of supporting evidence to support how you feel about it, or as a stakeholder you can look at it and go, “But you know, there’s a lot of things here that I’ve been frustrated about over the years”, and choose to look at this a different way and lean into it and go with a little bit of the unknown, but solving for things that you haven’t been able to solve for before.

John Pitts:

It’s always about solving the pain points and fundamentally solving the consumer pain points. I don’t want to throw us down a non-payments rabbit hole too far, but that decline issue actually to me is one of the things that completely separate from payments is going to be something that open banking helps solve for because who is a good credit risk versus who isn’t has largely been based on one system for a very long time, which is the credit reporting agencies using furnished data that is backward looking to assign credit risk to someone. It would be more than a series of podcasts to talk about why are we conflating credit risk with payment risk when in fact really what you care about is the merchant as the payment risk of that customer, not the credit risk of the customer, but we won’t go there.

On the credit risk side, the access for the consumer to be able to share their cashflow information from all of their accounts to a lender as an additional piece of information to show, “Yeah, no, the merchant knows I’m a good customer because my cashflow is great and my credit score may actually not be the best indication of whether I am a good risk for this co-branded card.” That’s another thing that open banking making this data easier to access and share is going to unlock, is that ability to do cashflow underwriting, provide additional data elements for your underwriting determinations that give you a better and more real time sense of that consumer and whether they are worthy of that responsible access to credit.

Yvette Bohanan:

We’re starting to see glimmers of that in what’s out there today. There are some companies doing that.

John Pitts:

We are, and I see it … Plaid is now supporting those companies with a CRA subsidiary that we launched specifically for that. It’s a really rapidly growing area in the credit space that we’re seeing. You’ve seen the federal government get behind it, starting with a bulletin from the prudential regulators in the CFPB in 2019, essentially telling lenders that use of cashflow data appeared to be reliable, safe, and free from any bias elements for fair lending purposes and should be considered as part of the underwriting mix by a lender. The OCC just today launched Project Reach 2.0, which is their own effort to expand access to credit and financial services and has included a cashflow underwriting component.

So this is not just an open banking movement, this is in general a movement in the direction of using some of these things that have been ubiquitous in small business lending for years, but consumers have never been able to benefit from, and I think that’s another way in which more consumers are going to get access to the payments ecosystem even on traditional cards because they’re going to be able to more effectively demonstrate that they can handle that product responsibly and get access to it.

Yvette Bohanan:

It’s a sleeper. This is definitely the sleeper. Open banking, mark my words, there’s power couples to be made and this is the sleeper element of it. With that, John, it’s the special time where we have to wrap things up. You can completely put that big, bold, green checkbox on your list of things you want to do in your career. Hearing your perspectives have just been … this has been just absolutely delightful and so much fun. Thank you for being on our podcast and I hope we can have you back in the future. It would be great.

John Pitts:

You bet. Thank you so much for having me. It was a wonderful conversation. I would love to be back anytime. Maybe we can check in in a few years and see how things are going with open banking and even score ourselves a little bit on what we were right about, what we overestimated, what we underestimated.

Yvette Bohanan:

That would be a lot of fun. I want to thank all of you listening. Thanks for joining us. Until next time, keep up the good work. Bye for now.

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