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November 10, 2022

How does interoperability support API data connectivity?

Ben White

Learn why data partners—from the largest financial institutions and regional banks to fintechs and digital banking platforms—are choosing to implement secure, reliable API-based data sharing and how Plaid’s Core Exchange is bringing together open finance stakeholders around an interoperable FDX-compliant API solution.

Consumers are using fintech more than ever to access their finances from anywhere at any time. Today, Americans use an average of four fintech apps and 75% use technology more than they did a year ago to help them weather economic challenges, save time and money, and feel more in control of their finances. Consumers increasingly rely on API-based data connectivity to seamlessly connect their various financial accounts to apps and services. 

Fintech Effect Quote for interoperability article: 83% of consumers want to choose where they share their information"

What’s an interoperable API data standard? 

When a product or system is interoperable, it means it can interact with other products or systems using the same standards. Data partners using an interoperable API data standard can build just one connection to all partner endpoints, including data networks and third party applications. That’s true for data partners of all sizes, from the largest financial institutions and community banks to fintechs and digital banking platforms. This results in faster implementation and a better user experience, but with fewer resources needed. That makes it easier for smaller institutions, with limited resources, to build secure API connectivity and connect to the open finance ecosystem. 

Data partners can also choose to build a proprietary API, a unique point of connectivity for each data network or third party application. Data networks allow data partners and third party applications to help their customers access open finance, and to receive consumer-permissioned data from other providers. Data networks are often referred to as data aggregators. 

Third party applications provide data-driven services to consumers. They first connect to their customer and then to the data network which passes authorized data the customer needs to power their use case (budget, pay bills, invest, etc.) or transaction. Applications are often referred to as Fintechs, but can range across different industries.

Interoperability Diagram 1

With an interoperable API, data partners can build just one connection to all partner endpoints.

How do data partners benefit from interoperability?  

Data partners can easily and securely connect customers to the many fintech apps and services they use. They benefit in the following ways:

  • Single point of connectivity: Data partners only need to build and service one point of connectivity to multiple partners’ endpoints. 

  • Faster implementation using fewer resources: Implementation can happen in as little as six to eight weeks and requires fewer developer resources when data partners use a scaled-down version of the API standard, discussed below.

  • Better user experience: Data partners can increase customer retention and reduce customer support costs when their consumers experience seamless and reliable data connectivity and minimal connection failures.

Colby Ross Quote

How do consumers benefit from interoperability?  

Many of today’s consumers are worried about gas prices, overall inflation, and the threat of a recession. They need reliable access to their digital financial tools to manage their finances and keep up with the rapidly changing economy. Consumers benefit from an interoperable standard in the following ways:

  • Data transparency and control: Consumers gain more control of their financial data. “API connectivity gives us as a digital banking provider, as well as our end-users, more transparency, flexibility, and control over data that is shared,” agrees Colby Ross, CEO of Project Finance, which uses Core Exchange, Plaid’s interoperable data connectivity solution.

  • Instant access: Consumers can quickly access financial tools when they urgently need to send funds or use overdraft protection to pay a bill.

  • Enhanced data security, privacy, and transparency: An interoperable API enhances data security and privacy because it includes standards for secure authentication and authorization, preventing third parties from gaining access to a consumer’s login details. Plaid’s APIs also enable greater transparency by allowing consumers to view their connections with Plaid Privacy Controls

Nine in ten Americans say that fintech helped them in some way

Do consumers care about their data connectivity? 

Consumers are quick to adopt API connectivity when it's offered. Seventy-three percent of Americans agree that their bank “needs to be able to connect to the apps and services I want.” [Plaid Fintech Effect 2022] When Wise, a UK-based provider of cross-border payments, connected via Core Exchange, thousands of its customers connected within weeks of the launch making it easier and more convenient for them to move money. 

Nine in 10 Americans (93%) say that fintech helped them in some way

How does interoperability improve the bottom line? 

Data partners that deliver reliable API connectivity can build and retain customer trust, increasing retention and improving the bottom line. It can also reduce customer support costs because there are fewer connection issues. When Michigan State University Federal Credit Union (MSUFCU) implemented an API solution, they reduced customer service tickets related to API connections by 67% and customer support chats by 26%. 

Data partners that don't provide a high-quality data sharing experience risk weaker ties to their customers. Sixty-four percent of US consumers using fintech reported, “I would consider switching banks if my primary bank could not connect to my financial accounts.” [Plaid Fintech Effect 2021

Who determines the interoperable data standard?  

The Financial Data Exchange (FDX) is the standards body working to align the industry around one common, interoperable API data standard. Learn more about the role of FDX here.

What’s the impact of policy or regulatory changes or new technologies? 

Under a market-driven system, interoperable standards ultimately make it easier for financial services providers to remain up-to-date with the latest requirements. For example, if a new set of rules imposes requirements for transparency in the user experience, then a single interoperable standard can meet those requirements at every connection instead of having to make one-off changes.  

That’s especially important because regulators across the world are at various stages of implementing open banking standards, providing consumers with rights over their financial information. Some countries, like the United Kingdom, have fully regulated technical standards that the largest financial providers are required to build, such as PSD2. Others, like the U.S. and Canada, are expected to follow a more market-driven approach, where regulators set rules that technical standards must comply with. 

What’s the role of the Financial Data Exchange (FDX)? 

In North America, technical standards for financial data sharing are generated by FDX, an industry consortium of banks, data networks, and fintech companies. Plaid is a board member of FDX and contributes technical expertise to multiple working groups, task forces, and review committees. Because fintech innovation moves quickly, FDX is a living standard, continually improving and updating its capabilities. Plaid works with data partners to develop and incorporate technical specifications into the FDX standard so that all parties can benefit from best-in-class data sharing technology.   

Don Cardinal quote

How does Plaid Core Exchange help unify the industry?

Plaid developed Core Exchange as a no-cost, secure data connectivity solution that expedites a data partner’s execution of interoperable APIs. Core Exchange simplifies implementation of the FDX API specification, helps data partners support the most popular fintech use cases (budgeting, paying bills, and investing), and enables API connectivity. By implementing Core Exchange, data partners connect to Plaid’s ecosystem of 7,000+ fintech apps and execute an industry standard data access integration that can be used with other data networks and third party applications. 

Plaid continues to develop solutions based on interoperable API data standards. Reach out to a Plaid integration expert or email our team directly at dataconnectivity@plaid.com to learn more about building interoperable data connectivity with Core Exchange.