Policy Pulse: The state of financial access

The Big Idea: Financial access methods are changing. Transitioning to APIs can ensure reliable, consistent, and robust financial access. 

In this version of the Policy Pulse, we explore three dimensions of the transition to APIs:

• What are financial access APIs?

• What’s driving the transition to APIs?

• What does this shift mean for consumers and fintech companies?

What are financial access APIs?

Application Programming Interfaces (APIs) are structured interfaces for transmitting data from one service to another. In the context of financial access, APIs provide one mechanism for consumer-permissioned data access, which allows consumers to share their data to power their favorite fintech tools. Financial institutions have recently started to build their own external APIs dedicated to allowing their customers to share their financial data. Dedicated external APIs can be more reliable than legacy methods due to a consistent infrastructure. However, they are expensive to build and maintain, and require substantial onboarding from third parties wanting to access them. Plaid’s launch of Plaid Exchange was largely motivated by the desire to minimize these costs to data holders.   

What’s driving the transition to APIs?

Plaid recently announced our focus on accelerating the transition to APIs. There are three key drivers behind this shift: widespread consumer fintech adoption, increased regulatory interest, and the rise and adoption of technical standards. 

Consumer fintech adoption: When fintech first came to prominence in the 2010s, most financial services companies did not have the infrastructure to allow their customers to share their data with these new financial tools. Today, fintech is mainstream - 73% of American consumers we surveyed say fintech is the “new normal” since COVID-19. So financial institutions and core banking providers that serve them are adopting APIs like Plaid Exchange to power data sharing for their customers. 

Partly, this is as a result of the competitive pressure fintechs have applied to banks. After all, many fintech tools that now have millions of users offer services that are directly competitive to legacy financial institutions, like overdraft protection, budgeting, and lending. Now that open finance is on the horizon, financial services providers (including both fintech companies and incumbents) want to incorporate consumer-permissioned data into their offerings. APIs that enable both in-and out-flows of data are essential to this open finance future. 

Increased regulatory attention: Regulators are showing increasing interest in ensuring consumers have secure, effective, and reliable access to their financial data. In October, the Consumer Financial Protection Bureau (CFPB) issued an Advanced Notice of Proposed Rulemaking on Dodd-Frank Section 1033, the provision granting consumers the right to access their financial records in electronic form. With these policy developments, regulators have established financial access as the new expectation for financial services providers. And since APIs can enable more robust data access, regulators are showing their preference for this type of connection. 

The rise of technical standards: Groups like Financial Data Exchange (FDX) are bringing together parts of the financial data ecosystem to design common API standards. These standards require negotiation among various parties, including financial institutions and data networks (Disclosure: Plaid is a board member of FDX). Often these parties have different perspectives on how and for what purpose API elements should be delivered. Financial institutions are beginning to adopt this standard, and partnering with data networks to build solutions that work for the fintech ecosystem and consumers. At the same time, data networks like Plaid are building their own technical standards like Plaid Exchange that banks can plug into. 

What this means for consumers and fintech companies

For consumers, the shift to APIs means more reliable access to their financial data. This is, of course, a shared goal for the entire ecosystem, and marks exciting progress and a new foundation for consumers’ engagement with fintech. 

For fintech companies, this shift means increased stability and dependability for consumer-permissioned data flows. Data networks will continue to compete on developer experience and consumer experience, driving the ecosystem towards greater consumer impact and more innovative plug-in products. Plaid will continue to provide single point of service APIs to fintech companies while managing integrations with the 10,000+ financial institutions in the U.S to ensure data quality, security, and reliability.

The shift to APIs reflects a new era for financial access, one in which consumers can expect robust, reliable, and consistent access to their financial data. With this transition underway, the next decade of fintech looks even more promising than the last.

Ben White works on Policy R&D at Plaid and is passionate about building an inclusive financial system that works for everyone.